Hydraulic Hoses, Inc. produces specialized industrial hoses for application such as high-pressure hydraulics and the transference of highly corrosive materials. The company recently implemented and ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for thress of its products and is interested in evaulating 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 syste. 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.

Product Selling Price Per Unit Units produced Total Costs Allocated Traditonal Costing Cost per Unit Traditonal Costing Total Cost allocated ABC Cost per Unit ABC

D-13 $14.65 250,000 $2,100,000 $8.40 $2,000,000 $8.00

K-17 15.60 140,000 1,280,000 9.14 1,235,000 8.82

R-23 18.50 20,000 1,214,500 10.73 369,500 17.98

Total 3,594,500 3,594,500

Required

a) Determine the gross profit margin for each product produced based on the ABC data[(Selling price - ABC cost per) x Unit produced].

b) Determine the gross profit margin for each product produced based on the traditional costing data [(Selling price - Tradtional cost per unit) x 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 ask with repsect 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.