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PROBLEM 7-17 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, L07-4, L07-5] 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 ....... Direct materials per unit ...... Direct labor per unit ........ Direct labor-hours per unit ............ Estimated annual production and sales ..... $140.00 $72.00 $24.00 2.0 DLHS 20,000 units $99.00 $53.00 $12.00 1.0 DLHs 80,000 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 ........ Estimated total direct labor-hours .............. $1,980,000 120,000 DLHs Required: Using Exhibit 7-13 as a guide, compute the product margins for the Xtreme and the Path- finder 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 activ- ity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs): Activities and Activity Measures Supporting direct labor (direct labor-hours) ... Batch setups (setups) ... Product sustaining (number of products) .... Estimated Expected Activity Overhead Cost Xtreme Pathfinder Total $ 783,600 40,000 80,000 120,000 495,000 200 100 300 602,400 99,000 NA NA NA $1,980,000 Other .. Total manufacturing overhead cost ........ Using Exhibit 7-11 as a guide, compute the product margins for the Xtreme and the Path- finder products under the activity-based costing system. 3. Using Exhibit 7-14 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assign- ments differ.
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