Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models: a cruising bike (Route 66), a street bike (Main Street), and a starter model (Alley Cat). 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 bike is similar. For this reason, PMI allocates overhead on the basis of machine-hours. Last year, the company shipped 1,100 Route 66s, 2,200 Main Streets, and 4,900 Alley Cats and had the following revenues and expenses.

PICKLE MOTORCYCLES, INC. Income Statement
	Route 66			Main Street			Alley Cat			Total
Sales revenue	$	7,500,000		$	10,800,000		$	9,300,000		$	27,600,000
Direct costs
Direct materials		3,300,000			4,500,000			4,300,000			12,100,000
Direct labor		281,000			486,000			1,040,000			1,807,000
Variable overhead
Machine setup											500,000
Order processing											1,350,000
Warehousing costs											1,891,500
Energy to run machines											986,000
Shipping											588,000
Contribution margin										$	8,377,500
Fixed overhead
Plant administration											1,790,000
Other fixed overhead											2,820,000
Gross profit										$	3,767,500

PMI's chief financial officer (CFO) hired a consultant to recommend cost allocation bases. The consultant recommended the following.

		Activity Level
Activity	Cost Driver	Route 66		Main Street		Alley Cat
Setting up machines	Number of production runs	20		35		45
Processing orders	Number of sales orders received	300		600		600
Warehousing	Number of units held in inventory	170		170		440
Using energy	Machine-hours	10,000		20,000		28,000
Shipping	Number of units shipped	1,000		3,700		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:

a. Using machine-hours to allocate production overhead, complete the income statement for Pickle Motorcycles. (See the "using energy" activity for machine-hours.) Do not attempt to allocate plant administration or other fixed overhead.

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

c. How might activity-based costing result in better decisions by Pickle Motorcycles's management?

A.

PICKLE MOTORCYCLES
Income Statement
	Route 66	Main Street	Alley Cat	Total
Sales revenue	$7,500,000	$10,800,000	$9,300,000	$27,600,000
Direct costs:
Direct material	3,300,000	4,500,000	4,300,000	12,100,000
Direct labor	281,000	486,000	1,040,000	1,807,000
Variable overhead
Contribution margin
Fixed overhead:
Plant administration				1,790,000
Other fixed overhead				2,820,000
Gross profit				$3,767,500

B.

PICKLE MOTORCYCLES
Income Statement
	Route 66	Main Street	Back Alley	Total
Sales revenue	$7,500,000	$10,800,000	$9,300,000	$27,600,000
Direct costs:
Direct material	3,300,000	4,500,000	4,300,000	12,100,000
Direct labor	281,000	486,000	1,040,000	1,807,000
Variable overhead:
Machine setup				500,000
Order processing				1,350,000
Warehousing costs				1,891,500
Energy to run machines				986,000
Shipping				588,000
Contribution margin
Fixed overhead:
Plant administration				1,790,000
Other fixed overhead				2,820,000
Gross profit				$3,767,500

C.

How might activity-based costing result in better decisions by Pickle Motorcycles's management?

	The activity-based costing method provides a more detailed breakdown of the costs.radio button unchecked1 of 2 The activity-based costing method provides a consolidated summary of the costs.radio button unchecked2 of 2