Assign overhead to products using ABC and evaluate decision. (LO 4), AP P4-28 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 produc- tion cost computed per unit under traditional costing for each model in 2014 was as follows. Traditional Costing Elite Preferred Direct materials $600 $320 Direct labor ($20 per hour) 100 80 Manufacturing overhead ($35 per DLH) Total per unit cost 175 140 $875 $540 In 2014, Kinnard manufactured 20,000 units of the Elite and 10,000 units of the Pre- ferred. 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 in- formation about overhead for the year ended December 31, 2014. Expected Use of Activity- Estimated Cost Based Overhead Activity Cost Driver Overhead Drivers Rate Purchasing Number of orders $775,000 25,000 $31 Machine setups Number of setups 580,000 20,000 29 Machining Machine hours 3,100,000 100,000 31 Quality control Number of inspections 445,000 5,000 89 The cost drivers used for each product were: Instructions Cost Driver Elite Preferred Total Purchase orders 11,250 13,750 25,000 Machine setups 11,000 9,000 20,000 Machine hours 40,000 60,000 100,000 Inspections 2,750 2,250 5,000 Problems: Set B 182 (a) Assign the total 2014 manufacturing overhead costs to the two products using activity- (a) Elite $2,152,500 based costing (ABC) and determine the overhead cost per unit. (b) What was the cost per unit and gross profit of each model using ABC costing? (b) Cost/unit-Elite $807.63 (c) Are management's future plans for the two models sound? Explain.