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Problem - Rocky Mountain Corporation makes two types of hiking boots-Xactive and the Pathbreaker. Data concerning these two product lines appear below:
Xactive
Pathbreaker
Selling price per unit
$127.00
$89.00
Direct materials per unit
$64.80
$51.00
Direct labor per unit
$18.20
$13.00
Direct labor-hours per unit
1.4 DLHs
1.0 DLHs
Estimated annual production and sales
25,000 units
75,000 units
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:
Estimated total manufacturing overhead
$2,200,000
Estimated total direct labor-hours
110,000 DLHs
Required:
1. Compute the product margins for the Xactive and the Pathbreaker products under the company's traditional costing system.
2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):
Estimated
Expected Activity
Activities and Activity Measures
Overhead Cost
Total
Supporting direct labor (direct labor-hours)
$797,500
35,000
75,000
110,000
Batch setups (setups)
680,000
250
150
400
Product sustaining (number of products)
650,000
1
2
Other
72,500
NA
Total manufacturing overhead cost
Compute the product margins for the Xactive and the Pathbreaker products under the activity-based costing system.
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.
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