Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LC7-3, LO7-4, LO7-5] Hi-Tek Manufacturing Inc. makes two types of industrial component parts the B300 and the T500. An absorption costing income statement for the most recent period is shown below: Hi-Tek Manufacturing Inc Income Statement Sales 2,100,000 Cost of goods sold 1,600,000 Gross margin 500.000 550,000 Selling and administrative expenses Net operating loss (50,000 Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of T500 at a price of $40 per unit. The company's 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 company's two product lines is shown below: Total B300 T500 Direct materials $436,300 $251,700 688,000 Direct labor 200,000 104,000 304.000 Manufacturing overhead 608.000 Cost of goods sold 1,600,000 The company has created an activity-based costing system to evaluate the profitability of its products. Hi Tek's ABC implementation team concluded that $50,000 and $100,000 of the company's 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 company's manufacturing overhead to four activities as shown below: Activity Manufacturing Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total Machining (machine-hours) $213,500 90,000 62,500 152,500 Setups (setup hours) 157.500 75 300 375 Product-sustaining (number of products) 120.000 Other (organization-sustaining costs) 117.000 $608,000 Total manufacturing overhead cost