Mattress Comfort Corporation 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, Mattress Comfort had the following revenues and costs:

Dreamer Sleeper Total

Revenue $700,000 $500,000 $1,200,000

Direct Materials 300,000 150,000 450,000

Direct Labor 150,000 75,000 225,000

Indirect Costs:

Administration 60,000

Production Setup 80,000

Quality Control 100,000

Sales and Marketing 180,000

Operating Profit $105,000

Mattress Comfort 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:

Activity Level

Activity Cost Driver Dreamer Sleeper

Production Setup Number of Production Runs 30 50

Quality Control Number of Inspections 25 75

Sales and Marketing Number of Advertisements 30 70

Assume that each Dreamer mattress is sold for $350 and that each Sleeper mattress is sold for $200.

Required:

1. Compute the operating income per unit of each mattress using a traditional costing system.
2. Compute the operating income per unit of each mattress using the activity-based costing system.
3. Explain the difference in the operating profit for each product under the traditional system and ABC.
4. Explain the pros and cons of using activity-based costing.