Reference no: EM131572645

Problem -

Smoky Mountain Corporation makes two types of hiking boots-Xtreme and the Pathfinder. Data concerning these two product lines appear below:  

	Xtreme	Pathfinder
Selling price per unit	$141.00	$91.00
Direct materials per unit	$64.50	$52.00
Direct labor per unit	$17.00	$10.00
Direct labor-hours per unit	1.7 DLHs	1.0 DLHs
Estimated annual production and sales	23,000 units	74,000 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 - $ 2,714,400                    

Estimated total direct labor-hours - 113,100 DLHs

Required:

1. Compute the product margins for the Xtreme and the Pathfinder 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):

Activities and Activity Measures	Estimated Overhead Cost	Activity
		Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$791,700	39,100	74,000	113,100
Batch setups (setups)	1,062,000	340	250	590
Product sustaining (number of products)	790,000	1	1	2
Other	70,700	NA	NA	NA
Total manufacturing overhead cost	$2,714,400

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.

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