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.
Income Statement |
| Sales | $ | 2,100,000 |
| Cost of goods sold | | 1,600,000 |
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| Gross margin | | 500,000 |
| Selling and administrative expenses | | 550,000 |
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| Net operating loss | $ | (50,000) |
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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 company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below: |
| B300 | T500 | Total |
| Direct materials | $ | 436,300 | $ | 251,700 | $ | 688,000 |
| Direct labor | $ | 200,000 | $ | 104,000 | | 304,000 |
| Manufacturing overhead | | | | | | 608,000 |
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| Cost of goods sold | | | | | $ | 1,600,000 |
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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 was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below: |
| Manufacturing | Activity
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| Activity Cost Pool (and Activity Measure) | 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 |
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| Total manufacturing overhead cost | $ | 608,000 | | | |
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| 1. | Compute the product margins for the B300 and T500 under the company’s traditional costing system. |
Solution: Hi-Tek Manufacturing Inc. makes two types of industrial component parts