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 companys 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):
Expected Activity
Activities and Activity Measures Estimated 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. Explain why the traditional and activity based cost assignments differ.