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
Gross margin
500,000
Selling 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. 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
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 was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:
Manufacturing
Activity
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
Total manufacturing overhead cost
$
608,000
Required
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