Thermal Rising, Incorporated, makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management designed an activity-based costing system with the following activity cost pools and activity rates:
| Activity Cost Pool | Activity Rate | |
|---|---|---|
| Supporting direct labor | $ 26 | per direct labor-hour |
| Order processing | $ 284 | per order |
| Custom design processing | $ 186 | per custom design |
| Customer service | $ 379 | per customer |
Management wants to calculate the profitability of a particular customer, Big Sky Outfitters, which ordered the following products over the last 12 months:
| Standard Model | Custom Design | |
|---|---|---|
| Number of gliders | 20 | 3 |
| Number of orders | 1 | 3 |
| Number of custom designs | 0 | 3 |
| Direct labor-hours per glider | 26.35 | 28.00 |
| Selling price per glider | $ 1,850 | $ 2,400 |
| Direct materials cost per glider | $ 564 | $ 634 |
The company’s direct labor rate is $19.50 per hour.
Required:
Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters.
Note: Round your intermediate calculations and final answer to the nearest whole dollar amount.
Hi-Tek Manufacturing, Incorporated, makes two industrial component parts—B300 and T500. An absorption costing income statement for the most recent period is shown below:
| Hi-Tek Manufacturing, Incorporated | |
| 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 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:
| Activity Cost Pool (and Activity Measure) | Manufacturing Overhead | Activity | ||
|---|---|---|---|---|
| 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 B300 and T500 under the company’s traditional costing system.
- Compute the product margins for B300 and T500 under the activity-based costing system.
- Prepare a quantitative comparison of the traditional and activity-based cost assignments.Hi-Tek Manufacturing, Incorporated, makes two industrial component parts—B300 and T500. An absorption costing income statement for the most recent period is shown below:
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:Hi-Tek Manufacturing, Incorporated 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)
The company 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: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 Activity Cost Pool (and Activity Measure) Manufacturing Overhead Activity 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 B300 and T500 under the company’s traditional costing system.
- Compute the product margins for B300 and T500 under the activity-based costing system.
- Prepare a quantitative comparison of the traditional and activity-based cost assignments.