Problem - Rocky Mountain Corporation makes two types of hiking boots-Xactive and the Pathbreaker. Data concerning these two product lines appear below:
|
Xactive
|
Pathbreaker
|
|
Selling price per unit
|
$127.00
|
$89.00
|
|
Direct materials per unit
|
$64.80
|
$51.00
|
|
Direct labor per unit
|
$18.20
|
$13.00
|
|
Direct labor-hours per unit
|
1.4 DLHs
|
1.0 DLHs
|
|
Estimated annual production and sales
|
25,000 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:
|
Estimated total manufacturing overhead
|
$2,200,000
|
|
Estimated total direct labor-hours
|
110,000 DLHs
|
Required:
1. Compute the product margins for the Xactive and the Pathbreaker 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):
|
Estimated
|
Expected Activity
|
|
Activities and Activity Measures
|
Overhead Cost
|
Xactive
|
Pathbreaker
|
Total
|
|
Supporting direct labor (direct labor-hours)
|
$797,500
|
35,000
|
75,000
|
110,000
|
|
Batch setups (setups)
|
680,000
|
250
|
150
|
400
|
|
Product sustaining (number of products)
|
650,000
|
1
|
1
|
2
|
|
Other
|
72,500
|
NA
|
NA
|
NA
|
|
Total manufacturing overhead cost
|
$2,200,000
|
|
|
|
Compute the product margins for the Xactive and the Pathbreaker products under the activity-based costing system.
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.