Shelby Electronics manufactures two large-screen television models: the Prime, which sells for $1,600, and a new model, the Deluxe, which sells for $1,300. Few per unit cost data are given:
Traditional Costing Prime Deluxe
DM $700 $420
DL ($20 per hour) $120 $100
MOH ($38 per DLH) $228 $190
In 2019, Shelby manufactured 25,000 units of the Prime and 10,000 units of the Deluxe. 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 Prime $552 or ($1,600 - $1,048), and Deluxe $590 or ($1,300 - $710). Because of this difference, management is considering phasing out the Prime model and increasing the production of the Deluxe model.
Before finalizing its decision, management asks Shelby’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, 2019.
Activities Cost
Drivers

Est. Overhead
Cost ($)

Activity
Level

Activity
Rate
Purchasing No. of orders 1,200,000 40,000 ??
Machine
Setups

No. of setups 900,000 18,000 ??

Machining Machine
hours

4,800,000 120,000 ??

Quality
Control

No. of
inspections

700,000 28,000 ??

Cost
Drivers

Prime Deluxe Total Activity
Level
Purchasing 17,000 23,000 40,000
Machine
Setups

5,000 13,000 18,000
Machining 75,000 45,000 120,000
Quality
Control

11,000 17,000 28,000

Required 
a) Calculate the activity rates for all the activity cost pools.
b) Assign the total 2019 manufacturing overhead costs to the two products using activity based costing (ABC) and determine the overhead cost per unit.
c) What was the cost per unit and gross profit of each model using ABC?
d) Explain the difference between the cost figures of Traditional and ABC system.
e) Are management’s future plans for the two models sound? Explain.