Reference no: EM132644646

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:

Hi-Tek Manufacturing Inc.

Income Statement

Sales                                                   $1,763,700

Cost of goods sold                                1,207,330

Gross margin                                         556,370

Selling and administrative expenses             600,000

Net operating loss                                $(43,630)

Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,700 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                                $400,400           $162,500      $562,900

Direct labor                                        $120,400          $42,300       162,700

Manufacturing overhead                                                                 481,730

Cost of goods sold                                                                     $1,207,330

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $54,000 and $110,000 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)                             $199,290         90,500      62,800     153,300

Setups (setup hours)                                    120,540               74           220          294

Product-sustaining (number of products)            101,800              1             1             2

Other (organization-sustaining costs)                 60,100              NA            NA           NA

Total manufacturing overhead cost                  $481,730

Required:

Question 1. Compute the product margins for the B300 and T500 under the company's traditional costing system.

Question 2. Compute the product margins for B300 and T500 under the activity-based costing system.

Question 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.