Question

Modern Tools makes two types of chain saws—High Grade and Professional. Data concerning these two product lines appear below:

	High Grade			Professional
Selling price per unit	$	215.50		$	387.00
Direct materials per unit	$	83.50		$	212.00
Direct labour per unit	$	30.00		$	45.00
Direct labour-hours per unit		1.0	DLHs		1.5	DLHs
Estimated annual production and sales		75,000	units		25,000	units

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labour-hours. Data concerning manufacturing overhead and direct labour-hours for the upcoming year appear below:

Estimated total manufacturing overhead	$1,350,000
Estimated total direct labour-hours	112,500 DLHs

Required:

1. Compute the product margins for the High Grade and the Professional products under the company’s traditional costing system.

	High Grade Professional Total Product margin $

2. The company is considering replacing its traditional costing system with an ABC 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	Overhead Cost		High Grade	Professional	Total
Supporting direct labour (direct labour-hours)	$	573,750	75,000	37,500	112,500
Batch setups (setups)		621,250	75	275	350
Product-sustaining (number of products)		110,000	1	1	2
Other		45,000	NA	NA	NA
Total manufacturing overhead cost	$	1,350,000

Compute the product margins for the High Grade and Professional products under the ABC system. (Round your intermediate calculations to 2 decimal places.)

	High Grade Professional Total Product margin $0

Answer 1