Overton Electronics manufactures two large-screen television models: the Royale which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2011 was as follows.

In 2011, Overton manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $38 per direct labor hour was determined by dividing total expected manufacturing overhead of $7,600,000 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was: Royale $552 or ($1,600 €“ $1,048), and Majestic $590 or ($1,300 €“ $710). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model.
Before finalizing its decision, management asks Overton€™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, 2011.

The cost drivers used for each product were:

Instructions
(a) Assign the total 2011 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.

Royale 700 120 228 Majestic $420 100 190 $710 Traditional Costing Direct materials Direct labor ($20 per hour) Manufacturing overhead ($38 per DLH) Total per unit cost $1,048 Activity Based Overhead Rate Expected Estimated Use of Activities Cost Drivers Overhead Cost Drivers Purchasing Machine setups Machining Quality coto Number of inspections Number of orders $1,200,000 900,00 4,800,000 40,000 18,000 120,000 28,000 25/inspection $30/order 50/setup 40/hour Number of setups Machine hours 700,000 Cost Drivers Purchase orders Machine setups Royale Majestic 15,000 5,000 75,000 9,000 25,000 13,000 45,000 19,000 Total 40,000 18,000 120,000 28,000 e hoirs Inspections