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:

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: Direct materials = $ 436,300; Direct labor $ 200,000;

T500: Direct materials = $ 251,700; Direct labor = $104,000

Total: Direct materials = $ 688,000; Direct labor = 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; T500; 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.