Hydraulic Hoses, Inc. produces specialized industrial hoses for applications such as high-pressure hydraulics and the transference of highly corrosive materials. The company recently implemented an ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for all of its products. To perform this evaluation the company has compiled data for the three products using both the traditional system and the new ABC system. The traditional system uses a single driver (direct materials costs). The ABC system uses a variety of cost drivers related to the activities used to produce the metal products. The three products involved in the trial run of the ABC system were D-13, K-17, and R-23. The following data relate to these products.

Required
a. Determine the gross profit margin for each product produced based on the ABC data [(Selling
price ˆ’ ABC cost per unit) × Unit produced].
b. Determine the gross profit margin for each product produced based on the traditional costing data [(Selling price ˆ’ Traditional cost per unit) × Unit produced].
c. Provide a possible explanation as to why the cost of R-23 increased under the ABC system while the cost D-13 decreased.
d. Suggest what action management might take with respect to the discoveries resulting from the
ABC versus traditional costing analysis. Assume that Hydraulic Hoses expects to produce a gross profit margin on each product of at least 40 percent of the selling price.

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Total Costs Allocated: Selling Price per Unit Units Produced Cost per Unit: Traditional Costing Total Cost Allocated: АВС Cost per Unit ABC Product Costing D-13 K-17 R-23 Totals $14.65 15.60 18.50 250,000 $2,100,000 $8.40 $ 8.00 $2,000,000 1,235,000 359,500 $3,594,500 40,000 1,280,000 214,500 9.14 8.82 20,000 10.73 17.98 $3,594,500