Posted: July 20th, 2016

What are the new deals made?

Jacobson 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 2010 was as follows.
Traditional Costing Royale Majestic
Direct materials $ 700 $420
Direct labor ($20 per hour) 120 100
Manufacturing overhead ($38 per DLH)
228

190

Total per unit cost
$1,048

$710

In 2010, Jacobson 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 Jacobson 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, 2010.
Activity
Cost Driver Estimated Overhead Expected Use
of Cost Drivers Activity Based Overhead Rate
Purchasing Number of orders $1,200,000 40,000 $30 /order
Machine setups Number of setups 900,000 18,000 50 /setup