MTI makes three types of lawn tractors: M3100, M4100, and M6100. In the past, it allocated overhead to products using machine-hours. Last year, the company produced 10,000 units of M3100, 16,500 units of M4100, and 8,000 units of M6100 and had the following revenues and costs:

MTI

Income Statement

M3100 M4100 M6100 Total

Sales revenue $ 8,600,000 $ 16,000,000 $ 12,600,000 $ 37,200,000

Direct costs

Direct materials 3,200,000 4,700,000 3,300,000 11,200,000

Direct labor 570,000 890,000 1,890,000 3,350,000

Variable overhead

Setting up machines 2,448,000

Processing sales orders 1,806,000

Warehousing 2,400,000

Operating machines 1,152,000

Shipping 966,000

Contribution margin $ 13,878,000

Plant administration 6,300,000

Gross profit $ 7,578,000

MTIs controller has heard about activity-based costing and puts together an employee team to recommend cost allocation bases. The employee team recommends the following.

Activity Cost Driver M3100 M4100 M6100

Setting up machines Production runs 9 21 21

Processing sales orders Sales orders received 180 440 240

Warehousing Units held in inventory 110 180 110

Operating machines Machine-hours 5,500 9,200 9,300

Shipping Units shipped 8,000 16,500 10,000

The employee team recommends that plant administration costs not be allocated to products.

Required:

a. Using machine-hours to allocate overhead, complete the income statement for MTI. Do not allocate plant administrative costs to products.

b-1. Compute the cost driver rates.

b-2. Complete the income statement using the activity-based costing method suggested by the employee team.