You have a new client, her name is Dorothy Buck. She is interested in diversifying her company; it is a small manufacturing company that assembles and packages many products by hand. She wants to automate the company and her projections indicate that the company will once again be profitable within two to three years. During your review of the company's records, you discovered that the company currently uses direct labor hours to allocate overhead to its products. Dorothy plans to continue using this approach due to its simplicity.

1. Write a memorandum to Dorothy that addresses whether or not direct labor should continue to be used as an allocation base for overhead and why.

2. Will the use of Activity-Based Costing help the company, how?

3. What insights could ABC provide regarding the company's profitability.