MTI makes three types of lawn tractors: M3100, M4100, and M6100. In the past, it allocated overhead to products using machine-hours. Last year, the company produced 10,000 units of M3100, 17,500 units of M4100, and 10,000 units of M6100 and had the following revenues and costs:

MTI's controller has heard about activity-based costing and puts together an employee team to recommend cost allocation bases. The employee team recommends the following:

The employee team recommends that plant administration costs not be allocated to products.

Required
a. Using machine-hours to allocate overhead, complete the income statement for MTI. Do not allocate plant administrative costs to products.
b. Complete the income statement using the activity-based costing method suggested by the employee team.
c. Write a brief report indicating how activity-based costing might result in better decisions by MTI.
d. After hearing the recommendations, the president expresses concern about failing to allocate plant administrative costs. If plant administrative costs were to be allocated to products, how would you allocatethem?

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MTI Income Statement M3100 M4100 M6100 Total Direct costs Direct materials Direct labor . 3,000,000 4,500,000 3,300,000 10,800,000 900,000 1,800,000 3,300,000 600,000 Variable overhead Setting up Processing sales orders Warehousing.... Operating machines. . Shipping 2,400,000 1,800,000 2,400,000 1,200,000 900,000 $14,700,000 6,000,000 $ 8,700,000 machines -. - - Contribution margin. . .. Plant administration . Gross profit. . .. Activity Cost Driver M3100 M4100 M6100 20 Sales orders received 180 400 220 Units held in inventory 100 200 100 6,000 9,000 10,000 10,000 7,500 10,000 10 20 Setting up machines Processing sales orders Warehousing Operating machines - -. -- Production runs Machine-hours Units shipped