Question

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 $ 1,780,400 Cost of goods sold 1,234,191 Gross margin 546,209 Selling and administrative expenses 560,000 Net operating loss $ (13,791) Hi-Tek produced and sold 60,400 units of B300 at a price of $21 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 $ 400,400 $ 162,400 $ 562,800 Direct labor $ 120,600 $ 42,800 163,400 Manufacturing overhead 507,991 Cost of goods sold $ 1,234,191 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 and $104,000 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) $ 203,091 90,500 62,200 152,700 Setups (setup hours) 143,500 70 280 350 Product-sustaining (number of products) 100,600 1 1 2 Other (organization-sustaining costs) 60,800 NA NA NA Total manufacturing overhead cost $ 507,991 1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. 1b. Compute the product margins for the B300 and T500 under the company’s traditional costing system. 1c. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.