Kinnard Electronics manufactures two home theater systems: the Elite which sells for $1,400, and a new model, the Preferred, which sells for $1,100. The production cost computed per unit under traditional costing for each model in 2012 was as follows.

In 2012, Kinnard manufactured 20,000 units of the Elite and 10,000 units of the Preferred. The overhead rate of $35 per direct labor hour was determined by dividing total expected manufacturing overhead of $4,900,000 by the total direct labor hours (140,000) for the two models. Under traditional costing, the gross profit on the models was: Elite $525 ($1,400 – $875), and Preferred $560 ($1,100 – $540). Because of this difference, management is considering phasing out the Elite model and increasing the production of the Preferred model. Before finalizing its decision, management asks Kinnard's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2012.

The cost drivers used for each product were:

Instructions
(a) Assign the total 2012 manufacturing overhead costs to the two products using activity-based costing (ABC).
(b) What was the cost per unit and gross profit of each model using ABC costing?
(c) Are management's future plans for the two models sound?Explain.

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Elite $600 100 Preferred $320 80 140 $540 Traditional Costing Direct materials Direct labor ($20 per hour) Manufacturing overhead ($35 per DLH) Total per unit cost $875 Expected Activity Based Overhead Rate Estimated Overhead 775,000 580,000 3,100,000 445,000 Use of Cost Drivers 25,000 20,000 100,000 Activit Cost Driver Purchasing Machine setups Machining Quality control Number of orders Number of setups Machine hours Number of inspections $31 29 31 89 5,000 EltePreferred Total Cost Driver Purchase orders Machine setups Machine hours Inspections 11,250 11,000 40,000 2,750 13,750 9,000 60,000 2,250 25,000 20,000 100,000 5,000