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