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 produced and sold 60,100 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:

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 $109,000 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

Hi-Tek Manufacturing Inc.
Income Statement   Sales $ 1,774,100   Cost of goods sold 1,224,178   Gross margin 549,922   Selling and administrative expenses 640,000   Net operating loss $ (90,078) 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.) B300 T500 Total Product margin 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.) B300 T500 Total Product margin

Explanation / Answer

1 Manufacturing overhead rate = 498278/163100 3.055 B300 T500 Total Sales 1262100 512000 1774100 Cost of goods sold Direct material 400600 162200 562800 Direct labor 121000 42100 163100 Manufacturing overheads 369661 128617 498278 (121000*3.055) (42100*3.055) Total cost of goods sold 891261 332917 1224178 Product margin 370839 179083 549922 Selling and administrative 640000 Net operating Loss -90078 ABC Total cost Total cost driver Cost per driver B300 T500 Total Machining cost 211278 153100 1.38 125442 85836 211278 Setup cost 124700 290 430 34400 90300 124700 Product sustaining 101400 2 50700 50700 50700 101400 Other cost 60900 498278 2 ABC B300 T500 Total Sales 1262100 512000 1774100 Cost Direct material 400600 162200 562800 Direct labor 121000 42100 163100 Machining cost 125442 85836 211278 Indirect cost Setup cost 34400 90300 124700 Product sustaining 50700 50700 101400 Advertising 58000 109000 167000 Total cost 790142 540136 1330278 Product margin 471958 -28136 443822 Other cost 60900 Other selling and admin 473000 Net operating loss -90078

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