CC manufactures three bicycle models, a racing bike, a mountain bike, and a children's bike. The racing model (RM) is made of a titanium-aluminum alloy. The mountain bike (MB) is made of aluminum. The children's bike (CB) is steel framed. Because of the different materials used, production processes differ significantly among models in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of bike is similar. For this reason, CC allocates overhead on the basis ofmachine hours. Last year, CC produced 1,000 RM, 2,000 MB, and 5,000 CB and had the following revenues and expenses:

CC

Income Statement

	RM	MB	CB	Total
Sales revenue	$ 380,000	$ 560,000	$ 475,000	$ 1,415,000
Direct Costs:
Direct materials	150,000	240,000	200,000	590,000
Direct labor	14,400	24,000	54,000	92,400
Variable overhead
Machine setup	?	?	?	26,000
Order processing	?	?	?	64,000
Warehousing costs	?	?	?	93,000
Energy to run machines	?	?	?	42,000
Shipping	?	?	?	36,000
Total Variable costs				943,400
Contribution margin				471,600
Fixed overhead
Plant administration				88,000
Other fixed overhead				140,000
Gross profit				$ 243,000

The Chief Financial Officer (CFO) of CC hired a consultant to recommend cost allocation bases. The consultant recommended the following:

		ACTIVITY LEVEL
Activity	Cost Driver	RM	MB	CB
1. Machine setup	Number of production runs	22	34	44
2. Sales order processing	Number of sales orders received	400	600	600
3. Warehousing costs	Number of units held in inventory	200	200	400
4. Energy	Machine Hours	10,000	16,000	24,000
5. Shipping	Number of units shipped	1,000	4,000	10,000

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

Required:

1. Using machine hours to allocate production overhead, complete the income statement for CC. Do not attempt to allocate plant administration or other fixed overhead costs.

2. Complete the income statement using the bases recommended by the consultant.

3. How might activity-based costing result in better decisions by CC's management.

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

MASTER OF BUSINESS ADMINISTRATION PROGRAM MANAGERIAL ACCOUNTING 63 SPRING SEMESTER 2019 CASE No. CC manufactures three bicycle models, a racing bike, a mountain bike, and a children's bike. The racing model (RM) is made of a titamium aluminum alloy. The mountain bike (MB) is made of aluminum. The children's bike (CB) is steel framed. Because of the diffcrent materials used, production processes differ significantly among models in terms of machine types and time requirements. Once parts are produced. however, assembly time per unit required for each type of bike is similar. For this reason, CC allocates overhead on the basis of machine hours. Last year, CC produced 1,000 RM, 2,000 MB, and 5,000 CB and had the following revenues and expenses: Income Statement 4750005 1AIS Direct Cest Dinect laber arable aca Warchossing costs The Chief Financial Officer (CFO) of CC hired a consultant to recommend cost allocation bases. The consultant recommended the I. Mahise sen Machine Hou The consultant found no basis for allocating the plant administration and other fixed overhead costs and recommended that these not be applied to products Required: 1. Using machine hours to allocate production overhead, complete the income statement for CC. Do not attempt to allocate plant administration or other fixed overhead costs 2. Complete the income statement using the bases recommended by the consultant. 3. How might activity-based costing result in better decisions by CCs 4. After hearing the consultant's recommendations, the CFO decided to adopt activity based costing but expressed concern about not allocating some of the overhead to the products (plant administration and other fixed overhead costs). In the CFOs view, "Products have to bear a fair share of all overhead or we wont be costs." How would you respond to this comment? covering all of our