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 - Compute the product margins for the B300 and T500 under the company's traditional costing system.