Deep Dreams Corporation manufactures two types of mattresses, Dreamer and Sleeper. Dreamer has a complex design that uses gel-filled compartments to provide support. Sleeper is simpler to manufacture and uses conventional padding. Last year, Deep Dreams had the following revenues and costs:

The company currently uses labor costs to allocate all overhead, but management is considering implementing an activity-based costing system. After interviewing the sales and production staff, management decides to allocate administrative costs on the basis of direct labor costs but to use the following bases to allocate the remaining overhead:

a. Complete the income statement using the activity bases above.
b. Write a brief report indicating how management could use activity-based costing to reduce costs.
c. Restate the income statement for Deep Dreams Corporation using direct labor costs as the only overhead allocation base.

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Dreamer Sleeper Total S695,000 250,000 100,000 $280,000 110,000 50,000 $975,000 360,000 150,000 Indirect Costs: 50,000 75,000 90,000 150,000 $100,000 Sales and Marketing Activity Level Activity Cost Driver Dreamer Sleeper Production Setup Quality Control Sales and Marketing Number of Production Runs Number of Inspections Number of Advertisements 10 30 25 40 60 50