Question

Problem 5-16 (Algo) Comparing Traditional and Activity-Based Product Margins [LO5-1, LO5-3, LO5-4, LO5-5]

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:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,772,200
Cost of goods sold		1,229,050
Gross margin		543,150
Selling and administrative expenses		640,000
Net operating loss	$	(96,850	)

Hi-Tek produced and sold 60,200 units of B300 at a price of $21 per unit and 12,700 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	$	400,200	$	162,900	$	563,100
Direct labor	$	120,400	$	42,500		162,900
Manufacturing overhead						503,050
Cost of goods sold					$	1,229,050

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 $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)	$	212,670		90,700	62,300	153,000
Setups (setup hours)		129,780		79	230	309
Product-sustaining (number of products)		100,400		1	1	2
Other (organization-sustaining costs)		60,200		NA	NA	NA
Total manufacturing overhead cost	$	503,050

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.

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 answers to the nearest whole dollar amount.)

	B300	T500	Total
Product margin			$0

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.)

	B300	T500	Total
Product margin			$0

Answer 1