Kenrick Corporation uses activity-based costing to compute product margins. In the first stage, the activity-based costing system allocates two overhead accounts equipment expense and indirect labor to three activity cost pools Processing, Supervising and Other based on resource consumption. Data to perform these allocations appear below. Overhead costs
Equipment expense $18,000
Indirect labor $2,000
Distribution of Resource Consumption Across activity cost pools
Activity Cost Pools
Processing Supervising Other
Equipment expense 0.10 0.30 0.60
Indirect labor 0.30 0.40 0.30
In the second stage. Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products as follows.
Activity
MHs (Processing) Batches (Supervising)
Product U4 5,500 600
Product C7 4,500 1,400
Total 10,000 2,000
Finally, sales and direct cost data are combined with Processing and Supervising costs to determine product margins.
Sales and Direct Cost Data:
Product U4 Product C7
Sales (total) $58,400 $31,800
Direct materials (total) $26,900 $13,900
Direct labor (total) $25,000 $11,200
What is the product margin for Product U4 under activity-based costing?
a. $3,500
b. $6,500
c. $5,180
d. $3,320