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 $ 1,653,900 Cost of goods sold 1,220,336 Gross margin 433,564 Selling and administrative expenses 600,000 Net operating loss $ (166,436 ) Hi-Tek produced and sold 60,100 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 $ 400,900 $ 162,400 $ 563,300 Direct labor $ 120,400 $ 42,800 163,200 Manufacturing overhead 493,836 Cost of goods sold $ 1,220,336 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $108,000 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) $ 211,836 90,000 62,400 152,400 Setups (setup hours) 119,600 79 220 299 Product-sustaining (number of products) 101,800 1 1 2 Other (organization-sustaining costs) 60,600 NA NA NA Total manufacturing overhead cost $ 493,836.
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.