Thatcher Supply manufactures and sells two types of pet doors—Standard and Hi-Tech. The Standard model is a basic opening installed in a door. The Hi-Tech model is automated and includes several safety features using electronics. The Hi-Tech model requires shorter production runs and more frequent inspection to ensure quality standards are met. In August, Thatcher Supply had the following financial results: 

Other selected information for units produced in August follow: 

Thatcher Supply currently uses direct labor-hours to allocate all overhead to the two models but is considering implementing an activity-based costing system. After interviewing the sales and production staff, the financial staff suggests they allocate administrative costs on the basis of revenue. They would use the following cost drivers to allocate the remaining three pools of overhead costs: 

Required

a. Complete the product-line income statement using the current system using direct labor-hours to allocate overhead costs.

b. Complete the product-line income statement using the proposed ABC system to allocate overhead costs.

c. Write a report to management stating why product-line profits differ using activity-based costing compared to the traditional approach. Indicate whether you believe activity-based costing provides more accurate information and, if so, why. Indicate in your report how the use of labor-based overhead allocation could cause management at Thatcher Supply to make suboptimal decisions.

d. How might using ABC help managers at Thatcher Supply manage costs? Be specific.

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THATCHER SUPPLY Income Statement For the Month of August Standard Hi-Tech $262,500 $168,500 51,720 34,500 95,000 38,000 Sales revenue Direct materials. Direct labor.... Overhead costs Administration. Machine setup.. Quality assurance Machine maintenance Operating profit.... Total $431,000 86,220 133,000 51,720 54,600 20,680 48,000 $36,780