Required: a) Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.
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 TRIX as it has continuously failed to reach the gross profit target of $600. Before finalizing its
decision, management asks TikTok Electronics
3
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:
a) Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.
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