PROBLEM 7-24 Comparing Traditional and Activity-Based Product Margins [LO1, 103, 104, 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: Sales Cost of goods sold Gross margin Sales and administrative expenses HI-TEK MANUFACTURING INC. Income Statement $2,100,000 1.600.000 500,000 550,000 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. The Page 283 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: Direct materials Direct labour Manufacturing overhead B300 $436,300 T500 $251,700 Total $ 688,000 $200,000 $104,000 $ 304,000 $ 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 (and Activity Measures) Machining (machine-hours) Setups (setup-hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead costs Required: Activity Manufacturing Overhead B300 T500 Total $213,500 90,000 62.500 152,500 157,500 75 300 375 120,000 1 I 2 117,000 $608,000 NA NA NA 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.