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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 $ 1,657,700
Cost of goods sold 1,223,306
Gross margin 434,394
Selling and administrative expenses 620,000
Net operating loss $ (185,606 )

Hi-Tek produced and sold 60,300 units of B300 at a price of $19 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 $ 400,800 $ 162,600 $ 563,400
Direct labor $ 120,000 $ 42,100 162,100
Manufacturing overhead 497,806
Cost of goods sold $ 1,223,306

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $51,000 and $109,000 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) $ 199,906 90,000 62,600 152,600
Setups (setup hours) 136,800 72 270 342
Product-sustaining (number of products) 100,400 1 1 2
Other (organization-sustaining costs) 60,700 NA NA NA
Total manufacturing overhead cost $ 497,806

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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