Question

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 below:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,689,500
Cost of goods sold		1,221,607
Gross margin		467,893
Selling and administrative expenses		620,000
Net operating loss	$	(152,107)

Hi-Tek produced and sold 60,100 units of B300 at a price of $20 per unit and 12,500 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	$	400,900	$	162,700	$	563,600
Direct labor	$	120,400	$	42,200		162,600
Manufacturing overhead						495,407
Cost of goods sold					$	1,221,607

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $54,000 and $105,000 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		Activity
Activity Cost Pool (and Activity Measure)	Overhead		B300	T500	Total
Machining (machine-hours)	$	203,357	90,400	62,500	152,900
Setups (setup hours)		130,050	79	210	289
Product-sustaining (number of products)		101,000	1	1	2
Other (organization-sustaining costs)		61,000	NA	NA	NA
Total manufacturing overhead cost	$	495,407

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 answer to the nearest whole dollars.)

      

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.)

       

3.	Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3) and other answers to nearest whole dollar amounts.)

     

     

Answer 1