Question

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

	Xtreme			Pathfinder
Selling price per unit	$	128.00		$	90.00
Direct materials per unit	$	63.10		$	50.00
Direct labor per unit	$	12.00		$	8.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		20,000	units		70,000	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	$	2,100,000
Estimated total direct labor-hours		100,000	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):

	Estimated Overhead Cost			Expected Activity
Activities and Activity Measures				Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	745,000		30,000	70,000	100,000
Batch setups (setups)		612,000		200	160	360
Product sustaining (number of products)		700,000		1	1	2
Other		43,000		NA	NA	NA
Total manufacturing overhead cost	$	2,100,000

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

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2
• Required 3

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

Requirement 1
	Xtreme Pathfinder Total Product margin $0

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.)

Requirement 2
	Xtreme Pathfinder Total Product margin $

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place.)

Requirement 3

Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Traditional Cost System Direct labor % % Direct materials % % Manufacturing overhead % % Total cost assigned to products $0 $0 $0 Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: Direct labor % % Direct materials % % Indirect costs: Supporting direct labor % % Batch setups % % Product sustaining % % Total cost assigned to products $0 $0 $0 Costs not assigned to products: Other 0 Total cost $0

Answer 1

1		Xtreme	PathFinder
	Sales Price	128	90			Total Manufacturing OH	2100000
	Less: Direct Material	63.1	50			Total Direct Labor Dollars	100000
	Less: Direct Labor	12	8			Overhead Per DLH	21.00
	Less: Maufacturing OH	31.5	21
	Product Margin	21.4	11	32.4
2		Xtreme	PathFinder			Activity Pools	Amt	Xtreme	PathFinder	Total	Per Driver
	Sales Price	128	90			Suporting DL	745000	30000	70000	100000	7.45
	Less: Direct Material	63.1	50			Setups	612000	200	160	360	1700
	Less: Direct Labor	12	8			Product Sustaining	700000	1	1	2	350000
	Less: Maufacturing OH	45.68	16.34			Other	43000	NA	NA	NA
	Product Margin	7.23	15.66			Total M OH	2100000
						Allocation:	Xtreme	PathFinder
						Suporting DL	223500	521500	(Activity Driver* Rate)
						Setups	340000	272000	(Activity Driver* Rate)
						Product Sustaining	350000	350000	(Activity Driver* Rate)
						Total M OH	913500	1143500
						Units	20000	70000
						Manufacturing OH	45.68	16.34
3
		Xtreme		PathFinder		Total
	Traditional Cost System	Amount	%	Amount	%	Amount
	Direct Material	1262000	59%	3500000	63%	4762000
	Direct Labor	240000	11%	560000	10%	800000
	Manufacturing OH	630000	30%	1470000	27%	2100000
	Total Cost assigned to products	2132000	100%	5530000	100%	7662000
	Activity Based Costing	Amount	%	Amount	%	Amount
	Direct Costs:
	Direct Material	1262000	52%	3500000	67%	4762000
	Direct Labor	240000	10%	560000	11%	800000
	Indirect Costs:
	Suporting DL	223500	9%	521500	10%	745000
	Setups	340000	14%	272000	5%	612000
	Product Sustaining	350000	14%	350000	7%	700000
	Total Cost assigned to products	2415500	100%	5203500	100%	7619000
	Costs not assigned to products:
	Others					43000
	Total Cost					7662000