Q. Currently, the company relies on a third-party carrier to deliver their frozen lobster rolls to different parts of the country. In order to streamline the storing and delivering of frozen lobster rolls that are ready to be shipped to customers, the senior management plan to invest $3 million to build a distribution center in the suburbs of Portland next year. The book value of the distribution center will be depreciated over the next 30 years. Could you help Olivia and her supervisor determine how the depreciation expense of the distribution center will affect the gross margin of the two products if the company uses the traditional costing system? If the company uses the activity-based costing system instead, how will the depreciation expense of the distribution center affect the product margin of the two products? For simplicity, assume that sales revenue and other costs remain the same next year.

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

Olivia has identified four activity cost pools and decided the distribution of overhead costs (manufacturing, administrative, and selling) across the four pools below:

Activity Cost Pools	Supporting direct labor	Order processing	Customer accommodations	Organization sustaining	Total
Manufacturing overhead	30%	10%	40%	20%	100%
Fixed selling expenses	10%	55%	25%	10%	100%
Total administrative expenses	5%	25%	10%	60%	100%

Information on the costs associated with the four activity cost pools can found in the traditional income statement on the previous page.

Product-specific data:

	Fresh	Frozen
Units sold	12,000	20,000
Unit selling price	$55	$75
Direct materials per unit	$20	$20
Direct labor hours per unit	0.2	0.2
Direct labor rate (per direct labor hour)	$30	$30
Predetermined overhead rate (per direct labor hour)	$50	$50
Variable selling expenses per unit	$2	$10

Data from the activity-based costing system:

		Expected activity
Activity cost pool	Activity measure	Fresh	Frozen	Total
Supporting direct labor	Number of direct labor hours	2,400	4,000	6,400
Order Processing	Number of purchase orders	300	200	500
Customer accommodations	Number of customer requests	200	0	200
Organization sustaining	Not applicable

Olivia considers customer accommodations as a product-level activity, because the cost associated with customer accommodations only incurs when customers order fresh lobster rolls, as mentioned before.

Production volumes are set equal to sales volumes since the company only make lobster rolls that they have orders for. Consequently, the company never has a beginning or ending work in process inventory, and it does not have a beginning or ending finished goods inventory either.