Question

Smoky Mountain Corporation makes two types of hiking boots-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 $ 115.00 $ 63.90 $ 12.00 1.2 DLHS Pathfinder $ 85.00 $ 51.00 $ 10.00 1.0 DLHS 28,000 units 75,000 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: $2,063,400 Estimated total manufacturing overhead Estimated total direct labor-hours 108,600 DLHs Required: 1. Compute the product margins for the Xtreme and the Pathfinder products under the company's traditional costing system. (Do not round your intermediate calculations.) Xtreme Pathfinder Total Product margin S 0

Answer 1

1. Allocation rate of manufacturing overheads as per the traditional costing system is as follows.

Manufacturingoverheadallocationrate = Estimatedtotal manufacturingoverhead Estimatedtotal directlabor - hours

Given information is, estimated total manufacturing overhead = 2,063,400 USD

Estimated total direct labor hours = 108,600 DLHs

Allocation rate = 2,063,400 / 108,600 = 19 USD / DLH

Calculation of manufacturing overhead per unit:

	Particulars	Xtreme	Pathfinder
a	DLHs per unit	1.2	1
b	Allocation rate (USD / DLH)	19	19
c	Manufacturing overhead per unit (a*b)	22.8	19

Calculation of product margin:

	Particulars	Xtreme (USD/unit)	Pathfinder(USD/unit)
a	Direct material	63.9	51
b	Direct labor	12	10
c	Prime cost (a+b)	75.9	61
d	Manufacturing overhead	22.8	19
e	Total cost (c+d)	98.7	80
f	Selling price (given)	115	85
g	Profit (f-e)	16.3	5
h	Margin (g/f*100)	14.17%	5.88%
i	Units producted and sold	28,000	75,000
j	Profit in USD (g*i)	456,400	375,000

2. Calculation of allocation rate for each activity (Other cost cannot be assigned to products since it is related organization stability and also as per activity based costing and hence excluding that cost in the calculations)

	Activity	Estimated overhead cost	Total activity	Allocation rate
1	Supporting direct labor	673,320	108,600	6
2	Batch setups	520,000	520	1,000
3	Product sustaining	790,000	2	395,000
	Total manufacturing overhead cost	1,983,320

Calculation of manufacturing overhead cost for each activity:

	Particulars	Xtreme	Pathfinder
1	Supporting direct labor	208,320	465,000
2	Batch setups	280,000	240,000
3	Product sustaining	395,000	395,000
4	Total manufacturing overhead cost	883,320	1,100,000
5	Units	28,000	75,000
6	Manufacturing overhead per unit (4/5)	31.55	14.67

Calculation of profit margin for each product:

	Particulars	Xtreme	Pathfinder
a	Direct material	63.90	51.00
b	Direct labor	12.00	10.00
c	Prime cost (a+b)	75.90	61.00
d	Manufacturing overhead	31.55	14.67
e	Total cost (c+d)	107.45	75.67
f	Selling price (given)	115.00	85.00
g	Profit (f-e)	7.55	9.33
h	Margin (g/f*100)	6.57%	10.98%
i	Units producted and sold	28,000	75,000
j	Profit in USD (g*i)	211,480	700,000

3. Quantitative comparison of traditional costing system:

	Xtreme		Pathfinder		Total
Particulars	Amount (USD)	% of Total	Amount (USD)	% of Total	Amount (USD)
Direct material	1,789,200	64.7%	3,825,000	63.8%	5,614,200
Direct labor	336,000	12.2%	750,000	12.5%	1,086,000
Manufacturing overhead	638,400	23.1%	1,425,000	23.8%	2,063,400
Total cost assigned to products	2,763,600		6,000,000		8,763,600

Quantitative comparison of activity based costing system:

	Xtreme		Pathfinder
Particulars	Amount (USD)	% of Total	Amount (USD)	% of Total	Amount (USD)
Direct costs:
Direct material	1,789,200	59.5%	3,825,000	67.4%	5,614,200
Direct labor	336,000	11.2%	750,000	13.2%	1,086,000
Indirect costs:
Supporting direct labor	208,320	6.9%	465,000	8.2%	673,320
Batch setups	280,000	9.3%	240,000	4.2%	520,000
Product sustaining	395,000	13.1%	395,000	7.0%	790,000
Total cost assigned to products	3,008,520		5,675,000		8,683,520
Costs not assigned to products					80,080
Total cost					8,763,600