Ellis Equipment (EE), manufactures three models of lawn tractor: EE-1000, EE-1800, and EE-2800. Because of the different materials used, production processes for each model differ significantly in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of tractor is similar. For this reason, EE allocates overhead on the basis of machine-hours. Last quarter, the company shipped 8,000 EE-1000s, 3,200 EE-1800s, and 800 EE-2800s. The revenues and expenses for the last quarter were as follows:

ELLIS EQUIPMENT
Income Statement
For the Quarter Ended June 30
	EE-1000	EE-1800	EE-2800	Total
Sales revenue	$ 12,800,000	$ 8,000,000	$ 3,520,000	$ 24,320,000
Direct costs
Direct materials	4,800,000	3,200,000	1,120,000	9,120,000
Direct labor	1,680,000	768,000	230,400	2,678,400
Variable overhead
Setting up machines				1,400,000
Quality testing				1,800,000
Painting				780,000
Operating equipment				155,000
Shipping				756,000
Contribution margin				$ 7,630,600
Fixed overhead
Facility administration				1,430,000
Miscellaneous fixed overhead				3,300,000
Gross profit				$ 2,900,600

The plant manager asked the plant controller about the possibility of adopting ABC. After consulting with the production supervisors in the plant, the controller recommended the following:

Activity	Cost Driver	Activity Level
EE-1000	EE-1800	EE-2800
Setting up machines	Number of production runs	154	238	308
Quality testing	Number of tests	320	200	80
Painting	Units shipped	8,000	3,200	800
Operating equipment	Machine-hours	5,000	8,000	12,000
Shipping	Number of units shipped	8,000	3,200	800

The controller also recommended that facility administration and miscellaneous fixed overhead costs not be applied to products, especially in the initial experiment with ABC.

Required:

Using machine-hours to allocate production overhead, complete the income statement for Ellis Equipment. Follow the controller's recommendation and do not attempt to allocate facility administration or miscellaneous fixed overhead.

Complete the income statement using the bases recommended by the controller.

How might activity-based costing result in better decisions by Ellis Equipments management?

\begin{tabular}{|c|c|c|c|c|c|c|c|c|} \hline \multicolumn{9}{|c|}{ ELLIS EQUIPMENT } \\ \hline \multicolumn{9}{|c|}{ Income Statement } \\ \hline & \multicolumn{2}{|r|}{ EE-1000 } & \multicolumn{2}{|c|}{ EE-1800 } & \multicolumn{2}{|c|}{ EE-2800 } & \multicolumn{2}{|r|}{ Total } \\ \hline Sales revenue & $ & 12,800,000 & $ & 8,000,000 & $ & 3,520,000 & $ & 24,320,000 \\ \hline \multicolumn{9}{|l|}{ Direct costs: } \\ \hline Direct material & & 4,800,000 & & 3,200,000 & & 1,120,000 & & 9,120,000 \\ \hline Direct labor & & 1,680,000 & & 768,000 & & 230,400 & & 2,678,400 \\ \hline \multicolumn{9}{|l|}{ Variable overhead } \\ \hline \multicolumn{9}{|l|}{ Contribution margin } \\ \hline \multicolumn{9}{|l|}{ Fixed overhead: } \\ \hline Plant administration & & & & & & & & 1,430,000 \\ \hline Other fixed overhead & & & & & & & & 3,300,000 \\ \hline Gross profit & & & & & & & $ & 2,900,600 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|} \hline \multicolumn{6}{|c|}{ ELLIS EQUIPMENT } \\ \hline \multicolumn{6}{|c|}{ Income Statement } \\ \hline & EE-1000 & EE-1800 & EE-2800 & & Total \\ \hline Sales revenue & $12,800,000 & $8,000,000 & $3,520,000 & & 24,320,000 \\ \hline \multicolumn{6}{|l|}{ Direct costs: } \\ \hline Direct material & 4,800,000 & 3,200,000 & 1,120,000 & & 9,120,000 \\ \hline Direct labor & 1,680,000 & 768,000 & 230,400 & & 2,678,400 \\ \hline \multicolumn{6}{|l|}{ Variable overhead: } \\ \hline Setting up & & & & & 1,400,000 \\ \hline Quality testing & & & & & 1,800,000 \\ \hline Painting costs & & & & & 780,000 \\ \hline Operating equipment & & & & & 155,000 \\ \hline Shipping & & & & & 756,000 \\ \hline \multicolumn{6}{|l|}{ Contribution margin } \\ \hline \multicolumn{6}{|l|}{ Fixed overhead: } \\ \hline Plant administration & & & & & 1,430,000 \\ \hline Other fixed overhead & & & & & 3,300,000 \\ \hline Gross profit & & & & $ & 2,900,600 \\ \hline \end{tabular}