Model X100 sells for $120 per unit whereas Model X200 offers advanced features and sells for$500 per unit. Management expects to sell 50,000 units of Model X100 and 5,000 units of ModelX200 next year. The direct material cost per unit is $50 for Model X100 and $220 for ModelX200. The company's total manufacturing overhead for the year is expected to be $1,995,000. A unit of Model X100 requires 2 direct labor hours and a unit of Model X200 requires 5 direct labor hours. The direct labor wage rate is $20 per hour.

Required:

i.The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. Using this traditional approach, compute the product margins for X100 and X200.

ii. Management is considering an activity-based costing system and would like to know what impact this would have on product costs. Preliminary analysis suggests that under activity-based costing, a total of $1,000,000 in manufacturing overhead cost would be assigned to Model X100 and a total of $600,000 would be assigned to model X200. In addition, a total of $150,000 in nonmanufacturing overhead would be applied to Model X100 and a total of $350,000 would be applied to Model X200. Using the activity-based costing approach, compute the product margins for X100and X200.

iii. Explain why the product margins computed in requirement (1) differ from those computed in requirement (2).