Precision Manufacturing Inc. (PMI) makes two types of industrial component parts the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below: Precision

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:

Precision Manufacturing Inc.

Income Statement

Sales $ 1,718,000

Cost of goods sold 1,233,054

Gross margin 484,946

Selling and administrative expenses 550,000

Net operating loss $ (65,054)

PMI produced and sold 60,500 units of EX300 at a price of $20 per unit and 12,700 units of TX500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base.

Additional information relating to the company’s two product lines is shown below:

EX300 TX500 Total

Direct materials $ 400,700 $ 162,200 $ 562,900

Direct labor $ 120,500 $ 42,400 162,900

Manufacturing overhead 507,254

Cost of goods sold $ 1,233,054

The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that $54,000 and $106,000 of the company’s advertising expenses could be directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

Manufacturing

Activity

Activity Cost Pool (and Activity Measure) Overhead EX300 TX500 Total

Machining (machine-hours) $ 211,554 90,300 63,000 153,300

Setups (setup hours) 133,600 74 260 334

Product-sustaining (number of products) 101,800 1 1 2

Other (organization-sustaining costs) 60,300 NA NA NA

Total manufacturing overhead cost $ 507,254

Required

1.

Compute the product margins for the EX300 and TX500 under the company’s traditional costing system. (Loss amounts should be indicated with a minus sign. Do not round intermediate calculations. Round your final answers to the nearest dollar amount. Omit the “$” sign in your response.)

EX300 TX500 Total

Product margin $ $ $

2.

Compute the product margins for EX300 and TX500 under the activity-based costing system. (Loss amounts should be indicated with a minus sign. Do not round intermediate calculations. Round your final answers to the nearest dollar amount. Omit the “$” sign in your response.)

EX300 TX500 Total

Product margin $ $ $

3.

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your percentage answers to one decimal place and other answers to the nearest dollar amount. Omit the “$” & “%” signs in your response.)

EX300 TX500 Total

Amount % of

Total Amount Amount % of

Total Amount Amount

Traditional Cost System

$ % $ % $

% %

% %

Total cost assigned to products $ $

Total cost $

Activity-Based Costing System

Direct costs:

$ % $ % $

% %

% %

Indirect costs:

% %

% %

% %

Total cost assigned to products $ $

Costs not assigned to products:

Total cost $

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