Aqua Furnishings Company, a manufacturer of custom designed restaurant and kitchen furniture, uses job order costing. Actual

Question:

Aqua Furnishings Company, a manufacturer of custom designed restaurant and kitchen furniture, uses job order costing. Actual factory overhead costs incurred during the month are applied to the products on the basis of actual direct labor hours required to produce the product. Factory overhead costs consist primarily of supervision, employee benefits, maintenance cost, property tax, and depreciation.
Aqua recently won a contract to manufacture the furniture for a new fast food chain that is expanding rapidly in the area. In general, this furniture is durable but of a lower quality than what Aqua normally manufactures. To produce this new line, Aqua must produce more molded plastic parts for furniture than it does for its current line. Through innovative industrial engineering, an efficient production process for this new furniture line has been developed, requiring only a minimum capital investment. Management is optimistic about the profit improvement the new product line will bring.
At the end of October, the start-up month for the new line, and again in November, the controller prepared a separate income statement for the new product line. On a consolidated basis, the gross profit percentage was normal; however, the profitability for the new line was smaller than expected. Management is concerned that knowledgeable stockholders will criticize the decision to add this lower-quality product line at a time when profitability appeared to be increasing with their standard product line. Gross profit results for the first 9 months, for October, and for November are as follows:

The controller contends that the overhead allocation based solely on direct labor hours is inappropriate and that only supervision and employee benefits should use this base, with the balance of overhead allocated on a machine hour basis. In the controller's judgment, the increase in custom design furniture profitability is partially a result of overhead misallocation.
The actual direct labor hours and machine hours for the past 2 months are as follows:

The actual factory overhead costs for the past 2 months were:

Required:
(1) Reallocate actual factory overhead for October and November following the controller's preference. (Round allocated costs to the nearest $100.)
(2) Present support or criticism of the controller's contention, based on requirement 1 results, and include revised statements of gross profit for October and November.