Question

Problem 5-16 (Algo) Comparing Traditional and Activity-Based Product Margins [LO5-1, LO5-3, LO5-4, LO5-5]

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	$	1,709,200
Cost of goods sold		1,257,251
Gross margin		451,949
Selling and administrative expenses		560,000
Net operating loss	$	(108,051	)

Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,800 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	$	400,300	$	162,900	$	563,200
Direct labor	$	120,400	$	42,400		162,800
Manufacturing overhead						531,251
Cost of goods sold					$	1,257,251

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 and $100,000 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)	$	212,531		90,500	62,400	152,900
Setups (setup hours)		157,520		78	280	358
Product-sustaining (number of products)		100,400		1	1	2
Other (organization-sustaining costs)		60,800		NA	NA	NA
Total manufacturing overhead cost	$	531,251

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

	B300 T500 Total Product margin

2.Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300 T500 Total Product margin

3. 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 and and other answers to the nearest whole dollar amounts.)

	B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products Total cost B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products Costs not assigned to products: Total cost

Answer 1