Model X100 sells for $120 per unit whereas Model X200 offers advanced features and sells for S500 per unit. Management expects to sell 50,000 units of Model X100 and 5,000 units of Model X200 next year. The direct material cost per unit is $50 for Model X100 and $220 for Model X200. The company’s total manufacturing overhead for the year is expected to be $1,995,000. A unit of Model X100 requires 2 direct labor-hours and a unit of Model X200 requires 5 direct labor-hours. The direct labor wage rate is $20 per hour.

Required:

1.         The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. Using this traditional approach, compute the product margins for X100 and X200.

2.         Management is considering an activity-based costing system and would like to know what impact this would have on product costs. Preliminary analysis suggests that under activity- based costing, a total of $1,000,000 in manufacturing overhead cost would be assigned to Model X100 and a total of $600,000 would be assigned to Model X200. In addition, a total of $150,000 in nonmanufacturing overhead would be applied to Model X100 and a total of $350,000 would be applied to Model X200. Using the activity-based costing approach, compute the product margins for X100 and X200.

3.         Explain why the product margins computed in requirement (1) differ from those computed in requirement (2).