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[SOLVED] Question & Answer: Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7…..

Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5]

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 below:
Hi-Tek Manufacturing Inc.
Income Statement
  Sales $ 1,635,300
  Cost of goods sold 1,221,790
  Gross margin 413,510
  Selling and administrative expenses 650,000
  Net operating loss $ (236,490)
Hi-Tek produced and sold 60,000 units of B300 at a price of $19 per unit and 12,700 units of T500 at a price of $39 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 $ 162,600 $ 562,900
  Direct labor $ 120,100 $ 42,800 162,900
  Manufacturing overhead 495,990
  Cost of goods sold $ 1,221,790
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $58,000 and $101,000 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 Activity
  Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total
  Machining (machine-hours) $ 204,350 90,400 62,100 152,500
  Setups (setup hours) 130,240 76 220 296
  Product-sustaining (number of products) 100,800 1 1 2
  Other (organization-sustaining costs) 60,600 NA NA NA
  Total manufacturing overhead cost $ 495,990
Required
1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollars.)
2. Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

 

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3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and “Percentage” answer to 1 decimal place. (i.e. .1234 should be entered as 12.3) and other answers to nearest whole dollar amounts.)

 

Expert Answer

 

prepare a quantitative comparison of the traditional and activity-based cost assignments

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