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Part 2 - Application Question - 30 Marks

Hi-Tek Manufacturing Inc. makes two types of industrial component partsthe 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
Sales 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 labour 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 labour	$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 were 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 Measures)		Activity
Manufacturing 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 costs	$608,000

Required:

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

Use the following steps:

1a. Calculate overhead rate using the traditional method.(3 Marks)

1b. Calculate product margins using the traditional method.(10 Marks)

B300

T500

Total

2a. Calculate the activity rate for each activity using ABC. (7 Marks)

Activity

Budgeted Cost

Driver

Rate

2b. Compute the Product Margin each model of phone using ABC.(10 Marks)

B300

T500

Total

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