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	$	121.00		$	91.00
Direct materials per unit	$	63.70		$	56.00
Direct labor per unit	$	8.80		$	8.00
Direct labor-hours per unit		1.1	DLHs		1.0	DLHs
Estimated annual production and sales		26,000	units		73,000	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	$	2,133,600
Estimated total direct labor-hours		101,600	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)	$	629,920		28,600	73,000	101,600
Batch setups (setups)		768,000		260	220	480
Product sustaining (number of products)		710,000		1	1	2
Other		25,680		NA	NA	NA
Total manufacturing overhead cost	$	2,133,600

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

Answer:

1.      Product margin under traditional costing system

	Xtreme	Pathfinder
Selling price per unit	121	91
Variable cost per unit
Direct material per unit	63.70	56
Direct labor per unit	8.80	8
Total variable cost per unit	72.50	64
Contribution per unit	48.50	27
Annual sales units	26000	73000
Total contribution	1261000	1971000
Less: Overhead	600600 (21*1.1*26000)	1533000 (21*1*73000)
Product margin	$660400	$438000

Note:

Overhead per direct labor = 2133600/101600

                                                = $21 per direct labor hour

2.      Product margin under Activity based costing system

	Xtreme	Pathfinder
Selling price per unit	121	91
Variable cost per unit
Direct material per unit	63.70	56
Direct labor per unit	8.80	8
Total variable cost per unit	72.50	64
Contribution per unit	48.50	27
Annual sales units	26000	73000
Total contribution	1261000	1971000
Less: Traceable overhead
Supporting direct labor hour	177320 (6.20*28600)	452600 (6.20*73000)
Batch setup	416000 (1600*260)	352000 (1600*220)
Product sustaining	355000 (355000*1)	355000
Total traceable cost	948320	1159600
Segment product margin	312680	811400

Total segment product margin = 1124080

Less: Common cost = 25680

Net margin = $1098400

Note:

Activity rate = Total overhead/Number of activity

Supporting direct labor = 629920/101600 = $6.20 per direct labor hour

Batch setups = 768000/480 = $1600 per setup

Product sustaining = 710000/2 = $355000 per product