Pepper's Products manufactures and sells two types of chew toys for pets, Squeaky and Silent. In May, Pepper's Products had the following costs and revenues:

Pepper's Products currently uses labor costs to allocate all overhead but is considering implementing an activity-based costing system. After interviewing the sales and production staff, management decides to allocate administrative costs on the basis of direct labor costs but to use the following bases to allocate the remaining overhead:

Required
a. Complete the income statement using the preceding activity bases.
b. Write a report indicating how management might use activity-based costing to reduce costs.
c. Restate the income statement for Pepper's Products using direct labor costs as the only overhead allocation base.
d. Write a report to management stating why product line profits differ using activity based costing compared to the traditional approach. Indicate whether activity-based costing provides more accurate information and why (if you believe it does provide more accurate information). Indicate in your report how the use of labor-based overhead allocation could cause management at Pepper's Products to make suboptimal decisions.

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PEPPER'S PRODUCTS Income Statement For the Month of May Squeaky Silent Total 4,000 9,600 $48,000 4,000 14,400 $91,200 8,000 24,000 Administration 6,000 12,000 6,000 4,800 $30.400 Distribution . . Activity Level Squeaky Silent Cost Driver Activity Setting up.... . . .._. . . . Performing quality control Number of production runs Number of inspections 10 30 10