Question

Smoky mountain corporation makes two types of hiking boots–the xtreme and the pathfinder. Data concerning these two product lines appear below:

Xtreme:
- Selling price per unit: $140.00
- Direct materials per unit: $72.00
- Direct labor per unit: $24.00
- Direct labor-hours per unit: 2.0 DLHs
- Estimated annual production and sales: 20,000 units

Pathfinder:
- Selling price per unit: $99.00
- Direct materials per unit: $53.00
- Direct labor per unit: $12.00
- Direct labor-hours per unit: 1.0 DLHs
- Estimated annual production and sales: 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: $1,980,000
- Estimated total direct labor-hours: 120,000 DLHs

Required:
1. Compute the product margins for the Xtreme and the Pathfinder 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 activity cost pools (the other cost pool includes organization-sustaining costs and idle capacity costs):

Answer 1

To calculate the total revenue, multiply the selling price per unit by the number of units sold. To calculate the total cost, add the fixed costs to the variable costs. The profit maximizing quantity occurs when marginal revenue equals marginal cost.

Step-by-step explanation:

To calculate the total revenue, we multiply the selling price per unit by the number of units sold. For example, for one unit, the total revenue is $72. The marginal revenue is the change in total revenue when one more unit is sold. For example, the marginal revenue from selling two units instead of one is $144 - $72 = $72.

To calculate the total cost, we add the fixed costs to the variable costs. For example, for one unit, the total cost is $100 (fixed costs) + $64 (variable costs) = $164. The marginal cost is the change in total cost when one more unit is produced. For example, the marginal cost of producing two units instead of one is $184 - $164 = $20.

The profit maximizing quantity occurs where marginal revenue equals marginal cost. In this case, it occurs when two units are produced, as the marginal revenue and marginal cost are both $72.

Total Revenue

• One unit: $72
• Two units: $144
• Three units: $216
• Four units: $288
• Five units: $360

Marginal Revenue

• From 1 to 2 units: $72
• From 2 to 3 units: $72
• From 3 to 4 units: $72
• From 4 to 5 units: $72

Total Cost

• One unit: $164
• Two units: $248
• Three units: $362
• Four units: $546
• Five units: $830

Marginal Cost

• From 1 to 2 units: $20
• From 2 to 3 units: $114
• From 3 to 4 units: $184
• From 4 to 5 units: $284