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:

Hi-Tek Manufacturing Inc. Income Statement

Sales $ 2,100,000

Cost of goods sold 1,600,000

Gross margin 500,000

Selling and administrative expenses 550,000

Net operating loss $ (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 companys 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 companys two product lines is shown below:

B300 T500 Total

Direct materials $ 436,300 $ 251,700 $ 688,000

Direct labor $ 200,000 $ 104,000 304,000

Manufacturing overhead $608,000

Cost of goods sold $ 1,600,000

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Teks ABC implementation team concluded that $50,000 and $100,000 of the companys 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 companys manufacturing overhead to four activities as shown below:

Activity Cost Pool and Activity Measure Manufacturing Overhead Activity

B300 B500 Total

Machining (Machine Hours) $213,500 90,000 62,500 152,500

Setups (setup hours) 157,500 75 300 375

Product-sustaining (number of products) 120,000 1 1 2

Other (Organization-sustaining costs) 117,000 NA NA NA

TOTAL MANUFACTURING OVERHEAD COST $608,000

Required:

1. Compute the product margins for the B300 and T500 under the companys 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.