Choosing an ABC system. Star Light Corporation manufactures three bicycle models:

ar acing bike, a mountain bike, and a children's model. The racing model is made of a titanium-aluminum alloy and is called the Aerolight. The mountain bike is called the Summit and is made of aluminum. The steel-framed children's bike is called the Spinner. Because of the different materials used, production processes differ significantly between models in terms of machine types and time requirements. However, once parts are produced, assembly time per unit required for each type of bike is similar.

For this reason. Star Light had adopted the practice of allocating overhead on the basis of machine hours. Last year, the company produced 2,000 Aerolights, 4,000 Summits, and 10,000 Spinners and had the following revenues and expenses:

The CFO of Star Light had heard about activity-based costing and hired a consultant to recommend cost allocation bases. The consultant recommended the following:

The consultant found no basis for allocating the plant administration and other fixed overhead costs and recommended that these not be applied to products.

a. Using machine hours to allocate variable overhead, complete the income statement for Star Light Corporation. Do not attempt to allocate fixed overhead.

b. Complete the income statement using the cost drivers recommended by the consultant.

c. How might activity-based costing result in better decisions by Star Light management?

d. After hearing the consultant's recommendations, the CFO decided to adopt activitybased costing, but expressed concern about not allocating some of the overhead (administration and other fixed overhead) to the products. In the CFO's view, "Products have to bear a fair share of all overhead or we won't be covering all our costs." How would you respond to this comment?

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STAR LIGHT CORPORATION Income Statement Sales Direct Costs Direct Materials Direct Labor Variable Overhead Machine Setup Order Processing Warehousing Costs Depreciation of Machines Shipping Aerolight Spinner Total Summit $760,000 $1,120,000 $950,000 $2.830,000 300.000 480,000 400,000 1,180,000 28.800 48,000 108.000 184,800 52,000 128,000 186,000 84,000 72,000 $ 943,200 Contribution Margin Fixed Overhead Plant Administration Other Fixed Overhead Operating Profit 176.000 280,000 $ 487,200