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 1,000 Route 66s, 2,000 Main Streets, and 5,200 Alley Cats and had the following revenues and expenses.

PICKLE MOTORCYCLES, INC. Income Statement
	Route 66			Main Street			Alley Cat			Total
Sales revenue	$	7,800,000		$	11,700,000		$	9,900,000		$	29,400,000
Direct costs
Direct materials		2,700,000			4,600,000			3,500,000			10,800,000
Direct labor		295,000			486,000			1,050,000			1,831,000
Variable overhead
Machine setup											475,000
Order processing											1,120,000
Warehousing costs											1,797,250
Energy to run machines											816,000
Shipping											564,000
Contribution margin										$	11,996,750
Fixed overhead
Plant administration											1,710,000
Other fixed overhead											2,760,000
Gross profit										$	7,526,750

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		30		45
Processing orders	Number of sales orders received	400		600		600
Warehousing	Number of units held in inventory	160		230		400
Using energy	Machine-hours	10,000		14,000		24,000
Shipping	Number of units shipped	1,200		3,900		9,000

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?

Required A:

PICKLE MOTORCYCLES
Income Statement
	Route 66	Main Street	Alley Cat	Total
Sales revenue	$7,800,000	$11,700,000	$9,900,000	$29,400,000
Direct costs:
Direct material	2,700,000	4,600,000	3,500,000	10,800,000
Direct labor	295,000	486,000	1,050,000	1,831,000
Variable overhead
Contribution margin	$4,805,000	$6,614,000	$5,350,000	$16,769,000
Fixed overhead:
Plant administration				1,710,000
Other fixed overhead				2,760,000
Gross profit				$7,526,750

Required B:

PICKLE MOTORCYCLES
Income Statement
	Route 66	Main Street	Back Alley	Total
Sales revenue	$7,800,000	$11,700,000	$9,900,000	$29,400,000
Direct costs:
Direct material	2,700,000	4,600,000	3,500,000	10,800,000
Direct labor	295,000	486,000	1,050,000	1,831,000
Variable overhead:
Machine setup				475,000
Order processing				1,120,000
Warehousing costs				1,797,250
Energy to run machines				816,000
Shipping				564,000
Contribution margin
Fixed overhead:
Plant administration				1,710,000
Other fixed overhead				2,760,000
Gross profit				$7,526,750