Precision Manufacturing Inc. (PMI) makes two types of industrial component parts€”the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:
Precision Manufacturing Inc.
Income Statement
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,700,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Selling and administrative expenses . . . . . . . . . 550,000
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . $ (50,000)
PMI produced and sold 60,000 units of EX300 at a price of $20 per unit and 12,500 units of TX500 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. PMI€™s ABC implementation team concluded that $50,000 and $100,000 of the company€™s advertising expenses could be directly traced to EX300 and TX500, 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:

Required:
1. Using Exhibit 7€“12 as a guide, compute the product margins for the EX300 and TX500 under the company€™s traditional costing system.
2. Using Exhibit 7€“10 as a guide, compute the product margins for EX300 and TX500 under the activity-based costing system.
3. Using Exhibit 7€“13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignmentsdiffer.

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EX300 TX500 Total Direct materials Manufacturing overhead. Cost of goods sold. 162,500 508,625 $1,200,000 Activity Manufacturing Overhead Activity Cost Pool (and Activity Measure) EX300 TX500 Total Setups (setup hours) . . . Product-sustaining (number of products)100,000 Other (organization-sustaining costs) Total manufacturing overhead cost$508,625 150,000 75 300 375 60,375 NA NA NA