Hi-Tek Manufacturing Inc. makes two types of industrial component parts—the B300

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 $ 2,100,000 Cost of goods sold 1,600,000 Gross margin 500,000 Selling and administrative expenses 550,000 Net operating loss $ (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. Additional information relating to the company’s two product lines is shown below: B300 T500 Total Direct materials $ 436,300 $ 251,700 $ 688,000 Direct labor $ 200,000 $ 104,000 304,000 Manufacturing overhead 608,000 Cost of goods sold $ 1,600,000 The company has created an activity-based costing system to evaluate the profitability of its products. 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: Manufacturing Activity Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total Machining (machine-hours) $ 213,500 90,000 62,500 152,500 Setups (setup hours) 157,500 75 300 375 Product-sustaining (number of products) 120,000 1 1 2 Other (organization-sustaining costs) 117,000 NA NA NA Total manufacturing overhead cost $ 608,000 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. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.) 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))

Explanation / Answer

Hi Tek Manufacturing Products B300 T500 Unit sold                                  70,000                 17,500 Unit sales price                                          20                          40 Absorption costing Income statement Details B300 T500 Total Sales revenue                            1,400,000               700,000     2,100,000.00 Cost of goods sold Ditect Materials                                436,300               251,700         688,000.00 Direct Labor                                200,000               104,000         304,000.00 Manufacturing Overhead                                400,000               208,000         608,000.00 Total cost og Goods sold                            1,036,300               563,700           1,600,000 Gross Profit margin                                363,700               136,300               500,000 Gross Profit margin% 25.98% 19.47% 23.81% Less selling & Admin expenses         550,000.00 Net Operating Loss         (50,000.00) ABC Costing Manufacturing Activity Activity cost pool   Overhead Cost OH B300 OH T500 Total Hrs Acitivity rate /M/c hrs Machining Machine hrs               213,500           90,000.00 62,500.00     152,500.00                  1.40 Set Ups Set up hrs               157,500                    75.00         300.00              375.00             420.00 Product sustaining   no of prodcuts               120,000                      1.00              1.00                  2.00       60,000.00 Other Organization sustaining               117,000 NA NA NA NA Total               608,000 Overhead allocation OH B300 OH T500 Machining                                126,000                 87,500 Set Ups                                  31,500               126,000 Product sustaining                                    60,000                 60,000 Total                                217,500               273,500 Hi Tek Manufacturing Products B300 T500 Unit sold                                  70,000                 17,500 Unit sales price                                          20                          40 ABC costing Income statement Details B300 T500 Total Sales revenue                            1,400,000               700,000     2,100,000.00 Cost of goods sold Ditect Materials                                436,300               251,700         688,000.00 Direct Labor                                200,000               104,000         304,000.00 Manufacturing Overhead allocated by ABC method                                217,500               273,500         491,000.00 Total cost og Goods sold                                853,800               629,200           1,483,000 Gross Profit margin                                546,200                 70,800               617,000 Gross Profit margin% 39.01% 10.11% 29.38% Less selling & Admin expenses traceable                                  50,000               100,000         150,000.00 Segmentwise Net operating margin                                496,200               (29,200)               467,000 Segmentwise Net operating margin% 35.44% -4.17% 22.24% Organization sustaining Manufacturing Overheads         117,000.00 Common selling & Admin expenses         400,000.00 Net Operating Loss         (50,000.00)

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