935 Choosingan Activity-Based Costing System Pickle Motorcycles, Inc. (PMI), manufactures three motorcyclemodels: a cruising bike (Route 66), a street bike (Main Street),and a starter model (Alley Cat). Because of the different materialsused, production processes for each model differ significantly interms of machine types and time requirements. Once parts areproduced, however, assembly time per unit required for each type ofbike is similar. For this reason, PMI allocates overhead on thebasis of machine-hours. Last year, the company shipped 1,000 Route66s, 4,000 Main Streets, and 10,000 Alley Cats and had thefollowing revenues and expenses: PMIs chief financial officer (CFO) hired a consultant torecommend cost allocation bases. The consultant recommended thefollowing:

The consultant found no basis for allocating the plantadministration and other fixed overhead costs and recommended thatthese not be applied to products. Required

A) Using machine-hours to allocate production overhead, completethe income statement for Pickle Motorcycles. (See the usingenergy activity for machine-hours.) Do not attempt toallocate plant administration or other fixed overhead.

B) Complete the income statement using the bases recommended bythe consultant. C) How might activity-based costing result in better decisions byPickle Motorcycless management? D) After hearing the consultants recommendations, the CFOdecides to adopt activity-based costing but expresses concern aboutnot allocating some of the overhead to the products (plantadministration and other fixed overhead). In the CFOs view,Products have to bear a fair share of all overhead or wewont be covering all of our costs. How would yourespond to this comment?