PROBLEM 7-17 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, L07-4,
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 .....
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 ..............
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
Activities and Activity Measures
Supporting direct labor (direct labor-hours) ...
Batch setups (setups) ...
Product sustaining (number of products) ....
Overhead Cost Xtreme Pathfinder Total
$ 783,600 40,000 80,000 120,000
99,000 NA NA NA
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-