Problem 7-17 (Algo) Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5]

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	$ 115.00		$ 84.00
Direct materials per unit	$ 65.50		$ 54.00
Direct labor per unit	$ 13.60		$ 8.00
Direct labor-hours per unit	1.7	DLHs	1.0	DLHs
Estimated annual production and sales	33,000	units	61,000	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	$ 1,756,500
Estimated total direct labor-hours	117,100	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):

Activities and (Activity Measures)	Estimated Overhead Cost	Expected Activity
Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$ 526,950	56,100	61,000	117,100
Batch setups (setups)	790,000	440	350	790
Product sustaining (number of products)	400,000	1	1	2
Other	39,550	NA	NA	NA
Total manufacturing overhead cost	$ 1,756,500

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.