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Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption...

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 $ 1,720,000
Cost of goods sold 1,234,688
Gross margin 485,312
Selling and administrative expenses 570,000
Net operating loss $ (84,688 )

Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,800 units of T500 at a price of $40 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 $ 162,100 $ 562,400
Direct labor $ 120,700 $ 42,600 163,300
Manufacturing overhead 508,988
Cost of goods sold $ 1,234,688

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 and $107,000 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) $ 205,288 90,300 62,900 153,200
Setups (setup hours) 141,300 74 240 314
Product-sustaining (number of products) 101,600 1 1 2
Other (organization-sustaining costs) 60,800 NA NA NA
Total manufacturing overhead cost $ 508,988

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.

2. Compute the product margins for B300 and T500 under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

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