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Question 2 - Week 5 (11 marks)
TikTok Electronics manufactures an aluminium fibre tripod model “TRI-X” which sells for $1,600. The production cost computed per unit under traditional costing for each model in 2019 was as follows:
| Traditional Costing | TRIX |
| Direct Materials | $700 |
| Direct Labour ($20/hour) | $120 |
| Manufacturing overhead ($38 per DLH) | $228 |
| Total per unit cost | $1, 048 |
In 2019, TikTok Electronics manufactured 26,000 units of TRI-X. Under traditional costing, the gross profit on TRI-X was $552 ($1,600-$1,048). Management is considering phasing out TRI-X as it has continuously failed to reach the gross profit target of $600. Before finalizing its decision, management asks TikTok Electronics management accountant to prepare an analysis using activity-based costing (ABC). The management accountant accumulates the following information about overhead for the year ended December 31, 2019.
| Activity Cost Pools |
Cost Drivers | Estimated Overhead |
Expected Use of Cost Drivers |
| Purchasing | Number of orders |
$1,200,000 | 40,000 |
| Machine setups | Number of setups |
900,000 | 18,000 |
| Machining | Machine hours | 4,800,000 | 120,000 |
| Quality Control | Number of inspections |
700,000 | 28,000 |
The cost drivers used:
| Cost Drivers | TRI-X Product |
| Purchase orders | 17,000 |
| Machine setups | 5,000 |
| Machine hours | 75,000 |
| Inspections | 11,000 |
Required:
- Calculate the activity rates for each of the overhead items using the four cost drivers. (3 marks)
- Using the rates in (1) determine the unit cost for TRI-X. (4 marks)
- Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued. (4 marks)
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