Shady Lady sells window coverings (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year.

The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:

Instructions
(a) Compute the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line.
(b) Compute the operating income for each product line, using the activity-based overhead rates.
(c) What do you believe Peggy Kingman shoulddo?

Transcribed Image Text:

Commercial Residential Revenues Direct material costs Direct labor costs Overhead costs $300,000 S480,000 30,000 100,000 50,000 300,000 150,000 215,000 85,000 85,000 500,000 (S 20,000) Operating income loss) Activity Cost Pools Scheduling and travel Estimated OverheadCost Drivers Setup time Supetvision $105,000 70,000 60,000 Hours of travel Number of setups Direct labor cost Expected Use of Cost Drivers per Product Scheduling and travel Setup time Commercial 1,000 450 Residential 500 250