Applewood's controller, Susan Benzo, is advocating the use of activity-based
costing and activity-based management and has gathered the following
information about the company's manufacturing overhead costs for the year
ended November 30,2010\((\mathrm{CMA},\) adapted) Applewood Electronics, a
division of Elgin Corporation, manufactures two large-screen television
models: the Monarch, which has been produced since 2006 and sells for \(\$
900\), and the Regal, a newer model introduced in early 2009 that sells for \(\$
1,140\). Based on the following income statement for the year ended November
30,2010 , senior management at Elgin have decided to concentrate Applewood's
marketing resources on the Regal model and to begin to phase out the Monarch
model because Regal generates a much bigger operating income per unit.Details
for cost of goods sold for Monarch and Regal are as follows:Applewood's
controller, Susan Benzo, is advocating the use of activity-based costing and
activity-based management and has gathered the following information about the
company's manufacturing overhead costs for the year ended November
30,2010.After completing her analysis, Benzo shows the results to Fred Duval,
the Applewood division president. Duval does not like what he sees." If you
show headquarters this analysis, they are going to ask us to phase out the
Regal line, which we have just introduced. This whole costing stuff has been a
major problem for us. First Monarch was not profitable and now Regal."'Looking
at the \(A B C\) analysis, 1 see two problems. First, we do many more activities
than the ones you have listed. If you had included all activities, maybe your
conclusions would be different. Second, you used number of setups and number
of inspections as allocation bases. The numbers would be different had you
used setup-hours and inspection-hours instead. I know that measurement
problems precluded you from using these other cost-allocation bases, but I
believe you ought to make some adjustments to our current numbers to
compensate for these issues. I know you can do better. We can't afford to
phase out either product."Benzo knows that her numbers are fairly accurate. As
a quick check, she calculates the profitability of Regal and Monarch using
more and different allocation bases. The set of activities and activity rates
she had used results in numbers that closely approximate those based on more
detailed analyses. She is confident that headquarters, knowing that Regal was
introduced only recently, will not ask Applewood to phase it out. She is also
aware that a sizable portion of Duval's bonus is based on division revenues.
Phasing out either product would adversely affect his bonus. Still, she feels
some pressure from Duval to do something.1. Using activity-based costing,
calculate the gross margin per unit of the Regal and Monarch models.
2\. Explain briefly why these numbers differ from the gross margin per unit of
the Regal and Monarch models calculated using Applewood's existing simple
costing system.
3\. Comment on Duval's concerns about the accuracy and limitations of ABC.
4\. How might Applewood find the ABC information helpful in managing its
business?
5\. What should Susan Benzo do in response to Duval's comments?
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