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 $1048 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 Calculate the activity rates for each of the overhead items using the four cost drivers. Using the rates in (1) determine the unit cost for TRI-X. Calculate the gross profit of each model of TRI-X based on ABC costings and recommend whether or not TRI-X should be discontinued.

Cornerstones of Cost Management (Cornerstones Series)

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ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter2: Basic Cost Management Concepts

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Problem 21E: Ellerson Company provided the following information for the last calendar year: During the year,...

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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	$1048

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

Calculate the activity rates for each of the overhead items using the four cost drivers.
Using the rates in (1) determine the unit cost for TRI-X.
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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