Problem 5-17 (Algo) Comparing Traditional and Activity-Based Product Margins [LO5-1, LO5-3, LO5-4, LO5-5]

Smoky Mountain Corporation makes two types of hiking bootsthe Xtreme and the Pathfinder. Data concerning these two product lines appear below:

	Xtreme	Pathfinder
selling price per unit	$120	$87
direct materials per unit	$65.20	$51
direct labor per unit	$11.20	$8
direct labor-hours per unit	1.4 DLHs	1.0 DLHs
estimated annual production and sales	30,000 units	65,000 units

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:

estimated total manufacturing overhead	$2,033,000
estimated total direct labor-hours	107,000 DLHs

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the companys 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):

	estimated		expected activity
activities and activity measures	overhead cost	extreme	Pathfinder	total
supporting direct labor (direct labor-hours)	631,300	42,000	65,000	107,000
batch setups	876,000	410	320	730
product sustaining (number of products)	460,000	1	1	2
other	65,700	NA	NA	NA
total manufacturing overhead cost	$2,033,000

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.

Required 1

	Xtreme	pathfinder	total
product margin

Required 2

	Xtreme	pathfinder	total
product margin

Required 3

	Xtreme		Pathfinder		Total
		% of		% of
	amount	total amount	amount	total amount	amount
traditional cost system
		%		%
		%		%
		%		%
total cost assigned to products
	Xtreme		Pathfinder		total
		% of		% of
	amount	total amount	amount	total amount	amount
activity-based costing system
direct:
		%		%
		%		%
Indirect costs:
		%		%
		%		%
		%		%
Total cost assigned to products
costs not assigned to products
total costs