Problem 3-ABC Shady Lady sells window coverings (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year.

Commercial Residential

Revenues $300,000 $480,000

Direct material costs 30,000 $ 50,000

Direct labor costs 100,000 300,000

Overhead costs 85,000 215,000 150,000 500,000

Operating income (loss) 85,000 ($ 20,000)

The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:

Activity Cost Pools Estimated Overhead Cost Drivers

Scheduling and travel 105,000 Hours of travel

Setup time 70,000 Number of setups

Supervision 60,000 Direct labor cost

Expected Use of Cost Drivers per Product

Commercial Residential

Scheduling and travel 1,000 500

Setup time 450 250

Required:

(a) Compute the activity-based overhead rates for each of the three cost pools, and determine

the overhead cost assigned to each product line.

(b) Compute the operating income for each product line, using the activity-based overhead

rates.

(c) What do you believe Peggy Kingman should do?