High Road Mountain Bikes produces three models of mountain bikes: Road Warrior, Hill Climber, and ProTrack. Each model is made from different materials and requires different types of machining in the production process. The company currently uses machine$-$hours to allocate manufacturing overhead. The CFO has drafted the following income statement for the most recent period:

ModelUnits Produced and SoldSalesDirect MaterialsDirect LaborRoad Warrior$5,000$$$1,250,000$$$400,000$$$125,000$Hill Climber$3,000$$$1,440,000$$$375,000$$$120,000$ProTrack$1,000$$$900,000$$$195,000$$$60,000$

Variable Overhead:

Overhead CategoryTotal CostMachine Setups$$152,500$Machining$$297,500$Processing Orders$$115,000$Plant Utilities$$525,000$Packing and Shipping$$430,000$

Fixed Overhead:

CategoryTotal CostOther Manufacturing Costs$$125,000$General and Administrative$$450,000$

The CFO hired a consultant to design an Activity$-$Based Costing $($ABC$)$ system to better evaluate the profitability of each of the company$$s products. The consultant provided estimates for the following activities and their respective cost drivers over the past three years:

ActivityRoad WarriorHill ClimberProTrackTotalMachine setups $($number$)20171350$Machining $($machine$-$hours$)2,4006,6008,50017,500$Processing orders $($orders$)29020085575$Plant utilities $($machine$-$hours$)2,4006,6008,50017,500$Packing and shipping $($units$)5,0003,0001,0009,000$

Required:

Using Exhibit $7-14$ as a guide, calculate the gross margin for each product under the company$$s traditional costing system.

Using Exhibit $7-12$ as a guide, calculate the gross margin for each product under the proposed ABC system.

Compare the product margins based on the traditional and activity$-$based cost assignments. What recommendations might the consultant make based on this comparison?