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A. A product has a contribution margin ratio of 40% and selling price of $30 per unit. Fixed costs are $11,000. Assuming the company increases the selling price to $40 and doubles fixed costs, what is the breakeven point in units?

B. Setup costs for Weird Al’s two different accordion products: The Polka, and The Super amounted to $12,000. Each product has the same number of set-ups. Weird Al used 4,000 labor hours to product The Polka, and 2,000 labor hours to produce The Super. Weird Al currently applies all overhead based on direct labors hours. However, after taking BUAD 2050 Weird Al is considering switching to activity based costing. What is the impact? The Polka is _____________________(indicate under or over-costed) by $__________ under traditional costing. The Super is _____________________(indicate under or over-costed) by $__________ under traditional costing.

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C. Super Apple Inc. harvests apples, and then makes apple sauce and apple cider. The joint cost of harvesting apples is $400,000. Once the apples are cleaned, they can made into apple sauce and apple cider. From the harvest, 24,000 gallons of apple sauce and 16,000 gallons of apple cider can be produced. The apple sauce can be sold as-is for $2 per gallon or processed further for an additional $4 per gallon and sold as premium apple sauce for $10 per gallon. The apple cider can be sold as-is for $3.25 per gallon or processed further for an additional $1 per gallon and sold as premium apple cider for $6 per gallon.

1. How much joint costs will be assigned to each product (apple sauce and apple cider), if joint costs are allocated on the basis of gallons produced?

2. How much joint costs will be assigned to each product (apple sauce and apple cider), if joint costs are allocated on the basis of relative sales?

3. Mickey Enterprises has three department stores that have the following floor space:

Department 1 20,000 square feet
Department 2 30,000 square feet
Department 3 50,000 square feet

How much of the $1,000,000 store rent be allocated to each department?

E. Give three examples of direct costs that would incur in a paper airplane manufacturing department (what costs can be easily traced to this specific department?) 1._________________________________________________________________________ 2._________________________________________________________________________ 3._________________________________________________________________________

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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.

Hi-Tek Manufacturing, Inc., makes two types of industrialcomponent parts—the B300 and the T500. An absorption costing incomestatement for the most recent period is shown: Hi-Tek ManufacturingInc. Income Statement Sales $ 1,710,000 Cost of goods sold1,235,260 Gross margin 474,740 Selling and administrative expenses620,000 Net operating loss $ (145,260 ) Hi-Tek produced and sold60,100 units of B300 at a price of $20 per unit and 12,700 units ofT500 at a price of $40 per unit. The company’s traditional costsystem allocates manufacturing overhead to products using aplantwide overhead rate and direct labor dollars as the allocationbase. Additional information relating to the company’s two productlines is shown below: B300 T500 Total Direct materials $ 400,500 $163,000 $ 563,500 Direct labor $ 120,300 $ 42,600 162,900Manufacturing overhead 508,860 Cost of goods sold $ 1,235,260 Thecompany has created an activity-based costing system to evaluatethe profitability of its products. Hi-Tek’s ABC implementation teamconcluded that $55,000 and $105,000 of the company’s advertisingexpenses could be directly traced to B300 and T500, respectively.The remainder of the selling and administrative expenses wasorganization-sustaining in nature. The ABC team also distributedthe company’s manufacturing overhead to four activities as shownbelow: Manufacturing Overhead Activity Activity Cost Pool (andActivity Measure) B300 T500 Total Machining (machine-hours) $198,770 90,800 62,100 152,900 Setups (setup hours) 147,490 73 270343 Product-sustaining (number of products) 101,600 1 1 2 Other(organization-sustaining costs) 61,000 NA NA NA Total manufacturingoverhead cost $ 508,860 Required: 1. Compute the product marginsfor the B300 and T500 under the company’s traditional costingsystem. 2. Compute the product margins for B300 and T500 under theactivity-based costing system. 3. Prepare a quantitative comparisonof the traditional and activity-based cost assignments.

PROBLEM 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, L07-3, L07-4, 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 ............. Cost of goods sold .... Gross margin .......... Selling and administrative expenses ...... Net operating loss ..... $2,100,000 1,600,000 500,000 550,000 $ (50,000) Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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. Addi- tional information relating to the company's two product lines is shown below: B300T500 Total $436,300 $200,000 $251,700 $104,000 Direct materials ........ Direct labor .............. Manufacturing overhead .... Cost of goods sold ........ $ 688,000 304,000 608,000 $1,600,000 The company has created an activity-based costing system to evaluate the profitability of its prod- ucts. Hi-Tek's ABC implementation team concluded that $50,000 and $100,000 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: Activity Manufacturing Overhead B300T500 Total Activity Cost Pool (and Activity Measure) Machining (machine-hours) ...... Setups (setup hours) ... Product-sustaining (number of products) .... Other (organization-sustaining costs) .... Total manufacturing overhead cost ....... 62,500 152,500 3003 75 $213,500 157,500 120,000 117,000 $608,000 90,000 75 1 NA NA NA Required: 1. Using Exhibit 7-13 as a guide, compute the product margins for the B300 and T500 under the company's traditional costing system. 2. Using Exhibit 7-11 as a guide, compute the product margins for B300 and T500 under the activity-based costing system. 3. Using Exhibit 7-14 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assign- ments differ.

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