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Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption...

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 $ 1,699,400
Cost of goods sold 1,245,844
Gross margin 453,556
Selling and administrative expenses 640,000
Net operating loss $ (186,444 )

Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,600 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 $ 400,100 $ 162,300 $ 562,400
Direct labor $ 120,000 $ 42,100 162,100
Manufacturing overhead 521,344
Cost of goods sold $ 1,245,844

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $57,000 and $101,000 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
Overhead
Activity
Activity Cost Pool (and Activity Measure) B300 T500 Total
Machining (machine-hours) $ 208,624 90,800 62,600 153,400
Setups (setup hours) 150,920 73 270 343
Product-sustaining (number of products) 100,800 1 1 2
Other (organization-sustaining costs) 61,000 NA NA NA
Total manufacturing overhead cost $ 521,344

Required:

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

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

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

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