PROBLEM 7-24 Comparing Traditional and Activity-Based Product Margins [2 LO1, 2 L03, 2 LO4, 2 LOS] 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. ncome Statera Sales $2,100,000 Cost of goods sold 1,600,000 Gross margin 500,000 Sales and administrative expenses 550,000 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. Page 283 The company's traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labour dollars as the allocation base. Additional information relating to the company's two product lines is shown below: B300 500 Total Direct materials $436,300 $251,700 $ 688,000 Direct labour $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 were organization-sustaining in nature. The ABC team also distributed the company's manufacturing overhead to four activities as shown below. Activity Cost Pool Activity (and Activity Measures) Manufacturing 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 1 1 2 Other (organization-sustaining costs) 117,000 NA NA NA Total manufacturing overhead costs $608,000 Required: 1. Using Exhibit 7-14 as a guide, compute the product margins for the B300 and T500 under the company's traditional costing system. 2. Using _ Exhibit 7-12 as a guide, compute the product margins for B300 and T500 under the activity-based costing system. 3. Using Exhibit 7-15 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments differ