precision manufacturing inc pmi makes two types of industrial component parts the ex 1551617

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 $ 1,700,000 Cost of goods sold 1,200,000 Gross margin 500,000 Selling and administrative expenses 550,000 Net operating loss $ (50,000) PMI produced and sold 60,000 units of EX300 at a price of $20 per unit and 12,500 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 $ 366,325 $ 162,550 $ 528,875 Direct labor $ 120,000 $ 42,500 162,500 Manufacturing overhead 508,625 Cost of goods sold $ 1,200,000 The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that $50,000 and $100,000 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) $ 198,250 90,000 62,500 152,500 Setups (setup hours) 150,000 75 300 375 Product-sustaining (number of products) 100,000 1 1 2 Other (organization-sustaining costs) 60,375 NA NA NA Total manufacturing overhead cost $ 508,625 Required 1. Compute the product margins for the EX300 and TX500 under the company’s traditional costing system. 2. Compute the product margins for EX300 and TX500 under the activity-based costing system. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments