Safety Doors Inc. manufactured three lines of products until 2008: Come-on-in, Who-is-it, and Stay-out. In 2008, after working at practical capacity, a report elaborated by the controller showed that Who-is-it had a negative product profit margin. The controller elaborate the following income statement allocating Manufacturing Overhead according to direct labor dollars: Total Income Statement (2008) Volume (units) Revenues Direct Materials Direct Labor Manufacturing Overhead Product Profit Margin Sales and Administration Profit before taxes Come-on-in 4,000 $1,000,000 $400,000 $320,000 $160,000 $120,000 Stay-out 1,000 $500,000 $400,000 $40,000 $20,000 $40,000 Who-is-it 9,000 $1,620,000 $900,000 $540,000 $270,000 ($90,000) $3,120,000 $1,700,000 $900,000 $450,000 $70,000 $50,000 $20,000 Max Gates, CEO of Safety Doors, was convinced that the Who-is-it product line caused the disappointing result in 2008. Consequently, he decided to drop it to redress the situation. Since the practical capacity remained unaltered, Max knew that he would have to deal with idle capacity in the future, but he was still convinced he made the right choice. However, in 2009, the controller's report did not confirm his conviction: Income Statement (2009) Volume (units) Revenues Direct Materials Direct Labor Manufacturing Overhead Product Profit Margin Sales and Administration Profit before taxes Come-on-in Stay-out Total 4,000 1,000 $1,000,000 $500,000 $1,500,000 $400,000 $400,000 $800,000 $320,000 $40,000 $360,000 $400,000 $50,000 $450,000 ($120,000) $10,000 ($110,000) $50,000 ($160,000) a. Max Gates has recently heard about a new costing system called ABC. He wants you to analyze the profitability of the three products with this new system. He provides you with the following additional information: Activities Machining Setup Total Manufacturing Overhead Cost Driver Machine Hours Number of Batches Total Activity Cost $300,000 $150,000 $450,000 Who-is-it Come-on-in 2 100 Machine hours per unit Batch Size (units per batch) Stay-out 10 10 2 100 I. Elaborate a new ABC income statement for 2008 containing the product margin for each product and the margin and profit for the whole company. Explain the difference in the margins between the new ABC system and the controller's calculations. II. 5. Calculate and write the ABC income statement for 2009. In doing so, assume that the additional information provided in part A is also accurate for 2009. (Hint: This should be a short exercise given the common data between the two years. Many of the calculations do not need to be redone.) c. Max is determined to do whatever is necessary to save the company. He is now pondering whether to restrict production to the only profitable product left according to his controller's calculations in 2009, Stay-out. Before taking any drastic action, however, he wants you to let him know what you think is happening. Explain to Max why his decision-making process is wrong