shady lady sells window coverings 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 materials cost $30,000 $70,000

Direct labour cost 100,000 300,000

Overhead costs 55,000 185,000 162,000 532,000

Operating income (loss) 115,000 $(52,000)

The controller, susan chan, is concerned about the residential product line. she cannot understand why this line is not more profitable given that window coverings are less complex to install for residential customers. in addition, the residential client base resides close 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 products lines to determine whether a more accurate product costing model can be developed. following are the three activity cost pools and related information she developed:

Activity cost pools Estimated overhead Cost drivers

Scheduling and travel $84,000 Hours of travel

Set-up time 77,000 Numbers of setup

Supervision 56,000 Direct labour cost

Expected use of cost drivers per product

Commercial Residential

Scheduling and travel 1,000 680

Set-up time 450 250

a. calculate the activity-based overhead rates for each of the three costs pools, and determine the overhead cost assigned to each product line.

b. calculate the operating income for each product line, using the activity-based overhead rates.

c. what do you believe Susan Chan should do?