Olivia has just got her accounting degree and started working for Mainely Lobster Inc., a company that is known for their delicious footlong lobster rolls. Shortly after the pandemic started, the company discontinued its restaurant business. Now they focus on delivering wholesale orders of fresh lobster rolls locally and frozen lobster rolls across the country. Olivia is a management trainee in the CFO's office, and one of her job responsibilities is to aggregate cost information for their products. She has noticed that the company has been using the traditional costing system for decades: all manufacturing overhead costs are allocated across products using a plant-wide predetermined overhead rate of $50 per direct labor hour. Olivia is very concerned with this practice, and she has mentioned to her superior that it is not appropriate for the company to use the traditional costing system, because different products require different amounts of indirect overhead resources. For example, under the traditional system all costs associated with accommodating local customers' special requests for fresh lobster rolls are part of manufacturing overhead costs and therefore allocated across products based on direct labor hours. However, frozen lobster rolls are prepared from the preset recipe, so there are no customers' special requests to handle. Given that traditional costing systems may result in significant cost distortions when determining products costs, Olivia's supervisor asked her to explore the potential for implementing activity-based costing. Olivia started with the company's 2021 traditional income statement. In 2021, the company only had two products: fresh lobster rolls and frozen lobster rolls. She would like to compare the two products' product margins under the activity-based costing system with their gross margins under our current traditional costing system. Mainely Lobster Income Statement Year Ended December 31, 2021 Sales $2,160,000 Cost of goods sold Direct materials $640,000 Direct labor $192,000 Manufacturing overhead $320,000 1,152,000 Gross margin 1,008,000 Selling and administrative expenses Variable Selling expenses 224,000 Fixed Selling expenses 250,000 Total administrative expenses 160,000 634,000 Net operating income $374,000