Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:

Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:

  

	Xtreme			Pathfinder
Selling price per unit	$	121.00		$	86.00
Direct materials per unit	$	65.30		$	52.00
Direct labor per unit	$	13.50		$	9.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		31,000	units		65,000	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	$2,230,000
Estimated total direct labor-hours	111,500 DLHs

  

Required:

1.

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.   3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3)) Explanation: 1. Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows:   Predetermined overhead rate = Estimated total manufacturing overhead cost Estimated total direct labor-hours   = $2,230,000 = $20.00 per DLH 111,500 DLHs* *31,000 units of Xtreme @ 1.5 DLH per unit + 65,000 units of the Pathfinder @ 1 DLH per unit = 46,500 DLHs + 65,000 DLHs = 111,500 DLHs Consequently, the product margins using the traditional approach would be computed as follows:     Xtreme    Pathfinder   Total   Sales $ 3,751,000   $ 5,590,000   $ 9,341,000       Direct materials   2,024,300     3,380,000     5,404,300     Direct labor   418,500     585,000     1,003,500     Manufacturing overhead     applied @ $20.00 per direct labor-hour   930,000     1,300,000     2,230,000       Total manufacturing cost   3,372,800     5,265,000     8,637,800       Product margin $ 378,200   $ 325,000   $ 703,200     Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system. 2. The first step is to determine the activity rates:   (a) (b) (a) ÷ (b)   Activity Cost Pool Total cost Total activity Activity Rate   Supporting direct labor $ 724,750   111,500  DLH $ 6.50  per DLH   Batch setups $ 975,000   750  setups $ 1,300  per setup   Product sustaining $ 470,000   2  products $ 235,000  per product *The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products. Under the activity-based costing system, the product margins would be computed as follows:     Xtreme   Pathfinder   Total   Sales $ 3,751,000   $ 5,590,000   $ 9,341,000       Direct materials   2,024,300     3,380,000     5,404,300     Direct labor   418,500     585,000     1,003,500     Supporting direct labor   302,250     422,500     724,750     Batch setups   546,000     429,000     975,000     Product sustaining   235,000     235,000     470,000       Total cost   3,526,050     5,051,500     8,577,550       Product margin $ 224,950   $ 538,500   $ 763,450     3. The quantitative comparison is as follows: Traditional Cost System Xtreme Pathfinder Direct materials $2,024,300 / $5,404,300 = 37.5% $3,380,000 / $5,404,300 = 62.5% Direct labor $418,500 / $1,003,500 = 41.7% $585,000 / $1,003,500 = 58.3% Manufacturing overhead $930,000 / $2,230,000 = 41.7% $1,300,000 / $2,230,000 = 58.3%       Activity-Based Costing System     Direct costs:       Direct materials $2,024,300 / $5,404,300 = 37.5% $3,380,000 / $5,404,300 = 62.5%   Direct labor $418,500 / $1,003,500 = 41.7% $585,000 / $1,003,500 = 58.3% Indirect costs:       Supporting direct labor $302,250 / $724,750 = 41.7% $422,500 / $724,750 = 58.3%   Batch setups $546,000 / $975,000 = 56.0% $429,000 / $975,000 = 44.0%   Product sustaining $235,000 / $470,000 = 50.0% $235,000 / $470,000 = 50.0%