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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

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

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