Computing Profit Using ABC Rockwell Company has three operating divisions. Gross margin computations for these three divisions for 2009 are given below.

Rockwell has determined that its total manufacturing overhead cost of $350,000 is a mixture of batch-level costs and product line costs. Rockwell has assembled the following information concerning the overhead costs, the annual number of production batches in each division, and the number of product lines in each division:

Required:
1. Prepare gross margin calculations for Rockwell’s three divisions assuming that manufacturing overhead is allocated based on the number of batches and the number of product lines.
2. By how much do the profits of the three divisions differ between the direct labor cost allocation method and ABC allocation? Assuming that allocating manufacturing overhead using the ABC method is more correct, what can you conclude from these differences?
3. After preparing the gross margin calculations in part (1), what advice do you have for Rockwell concerning whether it should shut down any of its three divisions? Is this the same advice that would come from looking at the original gross margin calculations using manufacturing overhead allocated according to direct labor cost? Why is there a difference?

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Sales Direct materials Direct labor Manufacturing overhead* Gross margin Division M $ 600,000 (100,000) (300,000) (210,000) $ (10,000) Division N Division O $ 400,000 (200,000) (60,000) (42,000) $ 300,000 (80,000) (140,000) (98,000) $ 98,000 $ (18,000) *Manufacturing overhead is allocated to production based on the amount of direct labor cost.