Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5] Hi-Tek Manufacturing, Inc., makes two types of industrial component partsthe B300 and the T500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Inc. Income Statement Sales $ 1,716,000 Cost of goods sold 1,238,330 Gross margin 477,670 Selling and administrative expenses 570,000 Net operating loss $ (92,330 ) Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,800 units of T500 at a price of $40 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 $ 42,700 162,700 Manufacturing overhead 512,530 Cost of goods sold $ 1,238,330 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Teks ABC implementation team concluded that $53,000 and $109,000 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: Manufacturing Overhead Activity Activity Cost Pool (and Activity Measure) B300 T500 Total Machining (machine-hours) $ 204,350 90,300 62,200 152,500 Setups (setup hours) 146,780 78 280 358 Product-sustaining (number of products) 100,600 1 1 2 Other (organization-sustaining costs) 60,800 NA NA NA Total manufacturing overhead cost $ 512,530 Required: 1. Compute the product margins for the 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.