Problem 7-16 (Algo) Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5]

Hi-Tek Manufacturing, Incorporated, makes two industrial component partsB300 and T500. An absorption costing income statement for the most recent period is shown below:

Hi-Tek Manufacturing, Incorporated
Income Statement
Sales	$ 1,641,100
Cost of goods sold	1,257,620
Gross margin	383,480
Selling and administrative expenses	650,000
Net operating loss	$ (266,520)

Hi-Tek produced and sold 60,100 units of B300 at a price of $19 per unit and 12,800 units of T500 at a price of $39 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	T500	Total
Direct materials	$ 401,000	$ 162,100	$ 563,100
Direct labor	$ 120,000	$ 42,600	162,600
Manufacturing overhead			531,920
Cost of goods sold			$ 1,257,620

The company created an activity-based costing system to evaluate the profitability of its products. Hi-Teks ABC implementation team concluded that $56,000 and $103,000 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)	$ 212,670	90,400	62,600	153,000
Setups (setup hours)	156,950	75	290	365
Product-sustaining (number of products)	101,400	1	1	2
Other (organization-sustaining costs)	60,900	NA	NA	NA
Total manufacturing overhead cost	$ 531,920

Required:

1. Compute the product margins for 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.