Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the company's work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies. The young founders of the company have become increasingly concerned with the economics of the business- particularly since many competitors have sprung up recently in the local area. To help understand the company's cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the animation goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are listed below: Activity Cost Pool Animation concept Animation production Contract administration Activity Measure Number of proposals Minutes of completed animation Number of contracts Activity Rate $5,700 per proposal $8,500 per minute $7,000 per contract These activity rates include all of the company's costs, except for its organization-sustaining costs and idle capacity costs. There are no direct labor or direct materials costs. Preliminary analysis using these ctivity has indicated that the local commercial segment the market may unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below: Local Commercials 23 Activity Measure Number of proposals Minutes of completed animation Number of contracts 11 6 The total sales from the 6 contracts for local commercials was $250,000. Required: 1. Calculate the cost of serving the local commercial market. 2. Calculate the margin earned serving the local commercial market. (Remember, this company has no direct materials por direct labor costs.) Complete this question by entering your answers in the tabs below. Required Required 2 Calculate the cost of serving the local commercial market. Cost of serving Smoky Mountain Corporation makes two types of hiking boots-the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Xtreme Pathfinder Selling price per unit $115.00 $ 83.00 Direct materials per unit $ 65.10 $ 50.00 Direct labor per unit $ 10.00 $ $ 10.00 Direct labor-hours per unit 1.0 DLHS 1.0 DLHS Estimated annual 29,000 units 71,000 units production and sales The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below: $1,800,000 Estimated total manufacturing overhead Estimated total direct labor- hours 100,000 DLHS Required: 1. Compute the product margins for the Xtreme and the Pathfinder products under the company's traditional costing system 2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization- sustaining costs and idle capacity costs): Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Other Total manufacturing overhead cost Estimated Expected Activity Overhead Cost Xtreme Pathfinder Total $ 520,000 29,000 71,000 100,000 781,000 400 310 710 440,000 1 1 2 59,000 NA NA NA $1,800,000 Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. Complete this question by entering your answers in the tabs below. Required Required Required 1 2 3 Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.) Xtreme Pathfinder Total Product $ 18 $ 18 $ 36 margin