Question

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales Xtreme $ 120.00 $ 63.60 $ 12.00 1.2 DLHS 25,000 units Pathfinder $ 87.00 $ 55.00 $ 10.00 1.0 DLHS 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 Required: 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):

Answer 1

1)	overhead rate
	estimated MOH/estimated DLH's
	2,040,000/102,000
	20	per direct labor hour
	product margin
				Xtreme	pathfinder	total
	sales			3000000	6264000
	less:Expense
	Direct materials			1590000	3960000
	Direct labor			300000	720000
	overhead			600000	1440000
	total cost			2490000	6120000
	product margin			510000	144000	654000
				Xtreme	pathfinder	total
	product margin			510000	144000	654000	answer
2)	overhead rate					oh rate
				amount	driver
	Activity
	Supporting direct labor			622,200	102,000	6.1
	batch setups			644,000	460	1400
	product sustaining			700,000	2	350000
	allocation of overhead and per unit cost
				Xtremet		Pathfinder
			Rate	driver	OH	Rate	Driver	OH
	Activity
	Supporting direct labor		6.1	30,000	183000	6.1	72,000	439200
	batch setups		1400	250	350000	1400	210	294000
	product sustaining		350000	1	350000	350000	1	350000
	total overhead				883000			1083200
	product margin
				Xtreme	pathfinder	total
	Selling price per unit			3000000	6264000
	less:Expense
	Direct materials			1590000	3960000
	Direct labor			300000	720000
	total overhead			883000	1083200	1966200
	total cost			2773000.00	5763200.00
	product margin			227000.00	500800.00	727800.00
				Xtreme	pathfinder	total
	product margin			227000	500800	727800	answer
	3)			Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Traditional Cost system
	Direct materials			1590000	28.6%	3960000	71.4%	5550000
	direct labor			300000	29.4%	720000	70.6%	1020000
	manufacturing overhead			600000	29.4%	1440000	70.6%	2040000
	total cost assigned to produts			2490000		6120000		8610000
				Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Activity based
	Direct materials			1590000	28.6%	3960000	71.4%	5550000
	direct labor			300000	29.4%	720000	70.6%	1020000
	indirect costs
	Supporting direct labor			183000	29.4%	439200	70.6%	622200
	batch setups			350000	54.3%	294000	45.7%	644000
	product sustaining			350000	50.0%	350000	50.0%	700000
	total cost assigned to products			2773000		5763200		8536200
	costs not assigned to products
	other							73,800
	total cost.							8610000