The Ski Corporation makes two types of skis-Better and Great. The data for the two product lines is:
Better Great
Selling price per unit 210 150
Direct materials per unit ($) 110 80
Direct labor per unit ($) 30 15
Direct labor-hours per unit 2 1
Estimated annual production 12,500 55,000
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours.
Estimated total manufacturing overhead $2,000,000
Estimated total direct labor-hours 80,000DLHs
Required:
1] Using Exhibit 6-12 as a guide, compute the product margins for the Better and Great products under the company's traditional costing systems. Assume all units are sold.
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 category contains organization-sustaining and idle capacity costs);
Activities and activity measures Est. Overhead costs Expected activity
Better Great Total
Supporting direct labor(DLH) 784,000 25,000 55,000 80,000
Batch setups (set ups) 500,000 400 100 500
Product sustaining (# of products) 600,000 1 1 2
Other 116,000 N/A N/A N/A
Total manufacturing overhead 2,000,000
Using Exhibit 6-10 as a guide, compute the product margins for the Better and Great products under the activity-based costing system.