Activity Based Costing Case Hi-Tek Manufacturing Inc. makes two types of industrial component partsthe 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. Additional information relating to the company's two product lines is shown below: B300 T500 Total $436,300 $200,000 $251,700 $104,000 Direct materials ........... Direct labor .............. Manufacturing overhead .... Cost of goods sold ........ $ 688,000 304,000 606,000 $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: Activity Activity Cost Pool (and Activity Measure) Manufacturing Overhead Total 152,500 375 Machining (machine-hours) .... Setups (setup hours) ................... Product-sustaining (number of products) .... Other (organization-sustaining costs) ...... Total manufacturing overhead cost ........ B300 T500 90,000 62,500 75 300 1 1 $213,500 157,500 120,000 117,000 $606,000 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. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments differ