Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models: a cruising bike (Route 66), a street bike (Main Street), and a starter model (Alley Cat). Because of the different materials used, production processes for each model differ significantly in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of bike is similar. For this reason, PMI allocates overhead on the basis of machine-hours. Last year, the company shipped 1,100 Route 66s, 2,100 Main Streets, and 4,500 Alley Cats and had the following revenues and expenses:

PICKLE MOTORCYCLES, INC. Income Statement
	Route 66			Main Street			Alley Cat			Total
Sales revenue	$	7,600,000		$	12,100,000		$	9,300,000		$	29,000,000
Direct costs
Direct materials		3,300,000			4,800,000			3,900,000			12,000,000
Direct labor		281,000			478,000			1,030,000			1,789,000
Variable overhead
Machine setup											475,000
Order processing											1,440,000
Warehousing costs											2,112,000
Energy to run machines											750,000
Shipping											830,000
Contribution margin										$	9,604,000
Fixed overhead
Plant administration											1,740,000
Other fixed overhead											2,840,000
Gross profit										$	5,024,000

PMI's chief financial officer (CFO) hired a consultant to recommend cost allocation bases. The consultant recommended the following:

		Activity Level
Activity	Cost Driver	Route 66		Main Street		Alley Cat
Setting up machines	Number of production runs	25		30		40
Processing orders	Number of sales orders received	500		700		600
Warehousing	Number of units held in inventory	220		240		420
Using energy	Machine-hours	10,000		16,000		24,000
Shipping	Number of units shipped	800		3,800		12,000

The consultant found no basis for allocating the plant administration and other fixed overhead costs and recommended that these not be applied to products.

Required:

a. Using machine-hours to allocate production overhead, complete the income statement for Pickle Motorcycles. (See the "using energy" activity for machine-hours.) Do not attempt to allocate plant administration or other fixed overhead. (Round your variable overhead rate to 2 decimal places and your final answers to the nearest whole dollar amount.)

b. Complete the income statement using the bases recommended by the consultant. (Do not round intermediate calculations.)

c. How might activity-based costing result in better decisions by Pickle Motorcycles's management?

• The activity-based costing method provides a more detailed breakdown of the costs.

• The activity-based costing method provides a consolidated summary of the costs.

Answer rating: 100% (QA)

a PICKLE MOTORCYCLES INC Income Statement Route 66 Main Streets Alley Cats Total Sales revenue 7600000 12100000 9300000 29000000 Direct costs Direct m... View the full answer