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

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

	Xtreme			Pathfinder
Selling price per unit	$	121.00		$	88.00
Direct materials per unit	$	64.70		$	54.00
Direct labor per unit	$	10.80		$	9.00
Direct labor-hours per unit		1.2	DLHs		1.0	DLHs
Estimated annual production and sales		25,000	units		71,000	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	$2,020,000
Estimated total direct labor-hours	101,000 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		Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	606,000	30,000	71,000	101,000
Batch setups (setups)		693,000	360	270	630
Product sustaining (number of products)		700,000	1	1	2
Other		21,000	NA	NA	NA
Total manufacturing overhead cost	$	2,020,000

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Negative customer margins should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

3.	Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

References

eBook & Resources

WorksheetLearning Objective: 07-01 Understand activity-based costing and how it differs from a traditional costing system.Learning Objective: 07-05 Use activity-based costing to compute product and customer margins.

Problem 7-17 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5]Learning Objective: 07-03 Compute activity rates for cost pools.

Difficulty: 3 Hard