Problem 7-17 Comparing Traditional and Activity-Based Product Margins [L07-1, LO
ID: 2540103 • Letter: P
Question
Problem 7-17 Comparing Traditional and Activity-Based Product Margins [L07-1, LO7-3, L07-4, LO7-5] Smoky Mountain Corporation makes two types of hiking boots-the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Pathfinder $ 87.00 $ 55.00 $ 10.00 Xtreme Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales 120.00 $ 63.60 $ 12.00 1.2 DLHs 1.0 DLHs 25,000 units 72,000 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 Estimated total direct labor-hours $ 2,040,000 102, 000 DLHs Requirec 1. Compute the product margins for the Xtreme and the Pathfinder 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 Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) other Overhead Cost Xtreme Pathfinder Total 102,000 460 622,200 644,000 700,000 73,800 2,040,000 30,000 72,000 210 250 NA NA. NA Total manufacturing overhead cost Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing systemExplanation / Answer
3.
1 Product margin under traditional system is Xtreme Pathfinder Total A No. of units 25,000 72,000 97,000 B Sale price per unit 120 87 C=A*B Sale Value 3,000,000 6,264,000 9,264,000 D Direct Material 1,590,000 3,960,000 5,550,000 E Direct Labor 300,000 720,000 1,020,000 F=D+E Total Direct Costs 1,890,000 4,680,000 6,570,000 G Manufacturing Overhead 600,000 1,440,000 2,040,000 H =F+G Total Product Cost 2,490,000 6,120,000 8,610,000 I=C-H Product Margin 510,000 144,000 654,000