Question

Drilling Innovations, Inc. produces specialized cutting heads used by companies that drill for oil and natural gas. The company recently implemented an ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for all of its products. To perform this evaluation the company has compiled data for the three products using both the traditional system and the new ABC system. The traditional system uses a single driver (machine hours). The ABC system uses a variety of cost drivers related to the activities used to produce the cutting heads. The three products involved in the trial run of the ABC system were GS-157, HS-241, and OS-367. The following data relate to these products.

							Total Costs				Cost per Unit:
	Selling Price per Unit			Units Produced			Allocated: Traditional Costing				Traditional			Total Cost Allocated:ABC				Cost per Unit ABC
Product											Costing
GS-157	$	19.30			120,000			$	1,600,000		$	13.3333			$	1,500,000		$	12.5000
HS-241		17.50			90,000				1,100,000			12.2222				1,050,000			11.6667
OS-367		15.10			40,000				400,000			10.0000				550,000			13.7500
Totals								$	3,100,000						$	3,100,000

Required

1. Determine the gross profit margin (in dollars, not percentage) for each product produced based on the ABC data.

2. Determine the gross profit margin (in dollars, not percentage) for each product produced based on the traditional costing data.

Answer 1

Requirement Gross Profit Margin under ABC Method Units Product Less : Selling Price Sales Revenue Produced per Unit Total Costs GS - 157 120,000 $ 19.30 $ 2,316,000 $ 1,500,000 HS-241 | 90,000 $ 17.50 $ 1,575,000 $ 1,050,000 Os - 367 40,000 $ 15.10 $ 604,000 $ 550,000 Gross Profit $ 816,000 $ 525,000 $ 54,000 Sales Revenue Total Costs Requirement Gross Profit Margin under Traditional Costing Method Units Selling Price Less : Product Gross Profit Produced per Unit GS - 157 120,000 $ 19.30 $ 2,316,000 $ 1,600,000 $ 716,000 HS - 241 90,000 $ 17.50 $ 1,575,000 $ 1,100,000 $ 475,000 OS - 367 40,000 $ 15.10 $ 604,000 $ 400,000 $ 204,000