Question

1) Utilizing the activity-based costing system information provided below, select the correct product margin.

Activity Cost Pool	Total Cost	Total Activity
Assembly	$900,000	6,000	machine-hours
Processing orders	$400,000	800	orders
Inspection	$250,000	250	inspection-hours

The company makes 2,000 units of Product XYZ a year, requiring a total of 500 machine-hours, 12 orders, and 20 inspection-hours per year. The product's direct materials cost is $150.00 per unit and its direct labor cost is $70.00 per unit. The product sells for $300.00 per unit.

	A.	$158,200
	B.	$30,833
	C.	$159,225
	D.	$59,000

2) Maxwell Corporation manufactures toy building sets. For the month of May, Maxwell sold 400,000 sets. Financial information relating to the building sets is shown below:

Selling price	$50	per unit
Cost of goods sold (all variable)	$24	per unit
Variable selling expense	$12	per unit
Total fixed selling expense	$400,000
Variable administrative expense	$8	per unit
Total fixed administrative expense	$600,000

Gross margin for May is .

Contribution margin for May is .

You must enter your answer in the following format: $x,xxx

Answer 1

• All working forms part of the answer
• Question 1

Activity Cost Pool	Total Cost	Total Activity		Overhead activity rates	Activity	Overhead allocated
Assembly	$      900,000	6000	machine-hours	$                      150	500	$                75,000
Processing orders	$      400,000	800	orders	$                      500	12	$                   6,000
Inspection	$      250,000	250	inspection-hours	$                   1,000	20	$                20,000
Total Overheads cost allocated						$              101,000
Direct Material cost [2000 units x 150]						$              300,000
Direct labor cost [2000 units x 70]						$              140,000
Total COST						$              541,000
Total Sales [2000 units x $ 300]						$              600,000
Product Margin = 600000 - 541000						$                59,000

Correct Answer = Option ‘D’ $ 59,000

• Question 2

Gross Margin = Sales – Cost of Goods Sold

= (400000 sets x $ 50) – (400000 sets x $ 24)

= $ 10,400,000 (or $ 26 per set)

Contribution margin = Sales – variable c0st

= (400000 x 50) – [ 400000 x (24 + 12 + 8) ]

= 20,000,000 – (400000 x 44)

= $ 2,400,000

Gross margin for May is $10,400,000

Contribution margin for May is $ 2,400,000