Required

a. Determine the gross profit margin for each product produced based on the ABC data
[(selling price 2 ABC cost per foot) 3 feet produced].
b. Determine the gross profit margin for each product produced based on the traditional
costing data [(selling price 2 traditional cost per foot) 3 feet produced].
c. Provide an explanation as to why the cost of M-63 may have increased under the ABC
system while the cost of R-150

Selling Allocated: Cost per Foot: Total Cost Costs per
Price per Feet Traditional Traditional Allocated: Foot:
Product Foot Produced Costing Costing ABC ABC
R-150 $14.65 250,000 $2,100,000 $ 8.40 $2,000,000 $ 8.00
R-127 15.60 140,000 1,280,000 9.14 1,235,000 8.82
M-63 18.50 20,000 214,500 10.73 359,500 17.98
Totals $3,594,500 $3,594,500

decreased.
d. Assume that Pressure Products expects to produce a gross profit margin on each product
of at least 40% of the selling price. Suggest what action management might take with
respect to the discoveries resulting from the ABC versus traditional costing analysis.

a. To determine the gross profit margin for each product based on the ABC data, you need to calculate the cost of production for each product and subtract it from the selling price.

For example, for R-150:
1. Multiply the selling price ($14.65) by the number of feet produced (250,000): $14.65 x 250,000 = $3,662,500 (this is the revenue generated).
2. Multiply the ABC cost per foot ($8.00) by the number of feet produced (250,000): $8.00 x 250,000 = $2,000,000 (this is the cost of production).
3. Calculate the gross profit margin by subtracting the cost of production from the revenue: $3,662,500 - $2,000,000 = $1,662,500.
4. Finally, divide the gross profit margin by the revenue and multiply by 100 to get the gross profit margin as a percentage: ($1,662,500 / $3,662,500) x 100 = 45.36%.

Repeat these steps for R-127 and M-63.

b. To determine the gross profit margin for each product based on the traditional costing data, follow the same steps as mentioned above, but use the traditional cost per foot instead of the ABC cost per foot.

c. The cost of M-63 may have increased under the ABC system due to the allocation of overhead costs. Activity-Based Costing (ABC) considers additional cost drivers, like the number of setups or machine hours, to allocate overhead costs more accurately. As a result, the cost of M-63, which may have more setups or require more machine hours compared to the other products, could be higher.

On the other hand, the cost of R-150 decreased because the overhead costs were allocated differently under the ABC system, resulting in a lower cost per foot.

d. If Pressure Products expects to produce a gross profit margin on each product of at least 40% of the selling price and the analysis shows that some products are below this threshold, management might take the following actions:

1. Review and adjust the pricing strategy: If the selling prices are lower than expected, management could consider raising the prices to achieve the desired profit margin.

2. Review and optimize production costs: Identify areas where costs can be reduced without compromising product quality. This could involve reevaluating suppliers, streamlining processes, or finding more cost-effective materials.

3. Evaluate product mix and focus on higher-margin products: If certain products have a higher gross profit margin, management could shift focus towards producing and promoting those products more, while potentially phasing out or reducing production of lower-margin products.

4. Improve cost allocation and tracking: Regularly review and refine the cost allocation methods to ensure accuracy. This could involve analyzing the cost drivers and adjusting the allocation of overhead costs based on the most significant factors.

Overall, the identification of the differences in gross profit margin based on ABC versus traditional costing analysis provides valuable insights for management to make informed decisions about pricing, cost optimization, and product mix to meet their profit targets.