Comparative income statements and management analysis. Comfort Plus, Inc., manufactures two types of mattresses. Dreamer and Sleeper. Dreamer has a complex design that uses gel-filled compartments to provide support. Sleeper is simpler to manufacture and uses conventional padding. Last year. Comfort Plus had the following revenues and costs:

Comfort Plus currently uses labor costs to allocate all overhead, but management 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:

a. Complete the income statement using the activity bases above.

b. Write a brief report indicating how management could use activity-based costing to reduce costs.

c. Restate the income statement for Comfort Plus. Inc., using direct labor costs as the only overhead allocation base.

d. Write a report to management stating why product-line profits differ using activitybased costing compared to the traditional approach. Indicate whether activitybased costing provides more accurate information and why (if you believe it does provide more accurate information). Indicate in your report how the use of laborbased overhead allocation could result in Comfort Plus management making suboptimal decisions.

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Revenue Direct Materials Direct Labor Indirect Costs: Administration Production Setup. Quality Control Sales and Marketing Operating Profit Dreamer Sleeper Total $600,000 250,000 $375,000 $975.000 110,000 360.000 100,000 50,000 150.000 50,000 75.000 90.000 150,000 $100,000