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	$	140.00		$	99.00
Direct materials per unit	$	72.00		$	53.00
Direct labor per unit	$	24.00		$	12.00
Direct labor-hours per unit		2.0	DLHs		1.0	DLHs
Estimated annual production and sales		20,000	units		80,000	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	$	1,980,000
Estimated total direct labor-hours		120,000	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)	$	783,600		40,000	80,000	120,000
Batch setups (setups)		495,000		200	100	300
Product sustaining (number of products)		602,400		1	1	2
Other		99,000		NA	NA	NA
Total manufacturing overhead cost	$	1,980,000

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

Answer 1