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Question
Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5]
Hi-Tek Manufacturing Inc. makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown below:
Hi-Tek Manufacturing Inc.
Income Statement
Sales $ 1,749,600
Cost of goods sold 1,235,306
Gross margin 514,294
Selling and administrative expenses 630,000
Net operating loss $ (115,706)
Hi-Tek produced and sold 60,100 units of B300 at a price of $21 per unit and 12,500 units of T500 at a price of $39 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:
B300 T500 Total
Direct materials $ 400,800 $ 162,900 $ 563,700
Direct labor $ 120,100 $ 42,200 162,300
Manufacturing overhead 509,306
Cost of goods sold $ 1,235,306
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 and $106,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:
Manufacturing
Activity
Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total
Machining (machine-hours) $ 213,226 90,900 62,500 153,400
Setups (setup hours) 135,080 77 230 307
Product-sustaining (number of products) 100,800 1 1 2
Other (organization-sustaining costs) 60,200 NA NA NA
Total manufacturing overhead cost $ 509,306
Required
1.
Compute the product margins for the B300 and T500 under the company’s traditional costing system.(Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollars.)
2.
Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)
3.
Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3) and other answers to nearest whole dollar amounts.)
