Problem Comparing Traditional and Activity-Based Product Margins Smoky Mountain Corporation makes two types of hiking boots-Xtreme and the Pathfinder. Data concerning these two product lines appear below: Selling price per unit Direct materials per unit Direct labor per unit... Direct labor-hours per unit .... Estimated annual production and sales Xtreme $140.00 $72.00 $24.00 2.0 DLHS 20,000 units Pathfinder $99.00 $53.00 $12.00 1.0 DLHS 80,000 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 $1,980,000 Estimated total direct labor-hours .. 120,000 DLHS mim Required: 1. Using Exhibit 713 as a guide, compute the product margins for the Xtreme and the Path- finder products under the company's 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) ... $ 783,600 40,000 80,000 120,000 Batch setups (setups) ....... 495,000 200 100 300 Product sustaining (number of products) 602,400 2 Other ... 99,000 NA NA Total manufacturing overhead cost $1,980,000 1 1 N NA Using Exhibit 7-11 as a guide, compute the product margins for the Xtreme and the Path-finder products under the activity-based costing system. 3. Using Exhibit 7-14 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 E F G H 1 Exhibit 7-13 Product MarginsTraditional Costing System B D 1 Product Margins-Traditional Cost System 2 Standard Stanchions 3 Sales $2.680.000 4 Cost of goods sold 5 Direct materials $ 905 500 6 Direct labor 263.750 7 Manufacturing overhead 875 000 2044 250 8 Product margin S 615 760 9 Selling and administrativo 10 Net operating income 11 Exhibit 7.12 Exhibit 7-13 Exhbt 7-14 Exhibit 7A-1 Exhibit 7A-2 Custom Compass Housings $ 540,000 Total $3.200.000 $ 9.500 87,500 125 000 $ 975,000 351,250 1.000.000 282 000 S 250.000 2326 250 873 750 875 000 S (1 250) Exhibit 7-11 Product MarginsActivity-Based Costing B D D E F Standard Stanchions $ 2.660,000 Custom Compass Housings $ 540.000 1 Product MarginsActivity-Based Costing 2 3 Sales 4 Costs 5 Direct materials 6 Direct labor 7 Shipping 8 Customer orders (from Exhibit 7-9) 9 Product design (from Exhibit 7-9) 10 Order size (from Exhibit 7-9) 11 Total cost 12 Product margin 13 $ 905,500 263.750 60.000 192.000 $ 69,500 87.500 5.000 128.000 252.000 47.500 332 500 1.753.750 S 906.250 589.500 149.500 S Exhibit 7-14 A Comparison of Traditional and Activity-Based Cost Assignments Standard Custom Compass Stanchions Housings (a) (a) = (c) (b) (b) = (0) Traditional Cost System Amount % Amount % Direct materials .. $ 905,500 92.9% $ 69,500 7.1% Direct labor 263,750 75.1% 87,500 24.9% Manufacturing overhead 875,000 87.5% 125,000 12.5% Total cost assigned to products $2,044,250 $282,000 Selling and administrative Total cost (c) Total $ 975,000 351,250 1,000,000 2,326,250 875,000 $3,201,250 $ 905,500 263,750 60,000 92.9% 75.1% 92.3% $ 69,500 87,500 5,000 7.1% 24.9% 7.7% $ 975,000 351,250 65,000 Activity-Based Costing System Direct costs: Direct materials Direct labor Shipping Indirect costs: Customer orders Product design Order size Total cost assigned to products Costs not assigned to products: Customer relations Other Total cost 192,000 0 332,500 $1,753.750 60.0% 0.0% 87.5% 128,000 252,000 47,500 $589,500 40.0% 100.0% 12.5% 320,000 252,000 380,000 2,343,250 367,500 490,500 $3,201,250