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Return to question Problem 7-16 (Algo) Comparing Traditional and Activity-Based Product Margins [LO7-1, L07-3, LO7-4, LO7-5] Hi-Tek Manufacturing, Incorporated, makes two types of industrial component parts-the B300 and the T500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Incorporated Income Statement Sales Cost of goods sold $ 1,706,000 1,220,620 485,380 580,000 Gross margin Selling and administrative expenses Net operating loss $(94,620) Hi-Tek produced and sold 60,300 units of 8300 at a price of $20 per unit and 12,500 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 Hi-Tek produced and sold 60,300 units of 8300 at a price of $20 per unit and 12,500 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: 8300 T500 Total Direct materials Direct labor $ 563,300 $ 400,300 $ 163,000 $ 120,800 $ 42,700 Manufacturing overhead 163,500 493,820 Cost of goods sold $ 1,220,620 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $51,000 and $101,000 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 Overhead Activity T500 8300 Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours). $ 199,420 90,600 62,800 Total 153,400 133,300 80 230 310 1 2 Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost 100,800 60,300 NA NA $ 493,820 Next > Prev 1 of 2 1 NA T500 B300 $ 400,300 $ 120,800 Direct materials Direct labor Manufacturing overhead Cost of goods sold $ 163,000 $ 42,700 Total $ 563,300 163,500 493,820 $ 1,220,620 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $51,000 and $101,000 of the company's advertising expenses could be directly traced to 8300 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 Overhead 8300 Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Activity T500 62,800 230 Total 153,400 90,600 80 310 Product-sustaining (number of products) Other (organization-sustaining costs) $ 199,420 133,300 100,800 60,300 1 1 2 NA NA NA Total manufacturing overhead cost $ 493,820 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