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James, Inc., manufactures only two products, Medium (42- inch) and Large (63- inch) TVs. To generate adequate profit and cover its expenses throughout the value chain, James prices its TVs at 300% of manufacturing cost. The company is concerned because the Large model is facing severe pricing competition, whereas the Medium model is the low-price leader in the market. The CEO questions whether the cost numbers generated by the accounting system are correct. The CEO just learned about ABC and wants to reanalyze this past year’s product costs using an ABC system. Information about the company’s products this past year is as follows: Medium (42- inch) TVs: Total direct material cost: $ 663,000 Total direct labor cost: $ 221,000 Production volume: 3,020 units Large (63- inch) TVs: Total direct material cost: $ 1,320,000 Total direct labor cost: $ 390,000 Production volume: 4,180 units Currently, thecompany applies manufacturing overhead on the basis of direct labor hours. The company incurred $ 838,000 of manufacturing overhead this year, and 25,500 direct labor hours (9,500 direct labor hours making Medium TVs and 16,000 making Large TVs). The ABC team identified three primary production activities that generate manufacturing overhead costs: Materials Handling($ 168,000); driven by number of material orders handled Machine Processing ($ 576,000); driven by machine hours Packaging ($ 94,000); driven by packaging hours The company’sonly two product
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