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Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5] 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 Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 1,639,100 1,221,620 417,480 590,000 s (172,520) Hi-Tek produced and sold 60,200 units of B300 at a price of $19 per unit and 12,700 units of T500 at a price of $39 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 Direct labor Manufacturing overhead Cost of goods sold 400,900 162,900 563,800 162,500 495,320 1,221,620 120,300 42,200 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 $109,000 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: Activit T500 Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Manufacturing Overhead $ 214,340 119,280 101,400 B300 Total 91,000 62,100 153,100 210 7 4 284 60,300 NA NA NA $ 495,320

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