FreeWheeler, Ltd., manufactures three bicycle models: a racing bike, a mountain bike, and a children€™s model. The racing model is made of a titanium-aluminum alloy and is called the Featherweight. The mountain bike is called the Peak and is made of aluminum. The steel-framed children€™s bike is called the Raider. Because of the different materials used, production processes differ significantly among models in terms of machine types and time requirements. However, once parts are produced, assembly time per unit required for each type of bike is similar. For this reason, FreeWheeler, Ltd., had adopted the practice of allocating overhead on the basis of machine hours. Last year, the company produced 2,000 Featherweights, 4,000 Peaks, and 10,000 Raiders and had the following revenues and expenses:

The CFO of FreeWheeler had heard about activity-based costing and hired a consultant to recommend cost allocation bases. The consultant recommended the following:

The consultant found no basis for allocating the plant administration and other fixed overhead costs and recommended that these not be applied to products.
a. Using machine hours to allocate variable overhead, complete the income statement for
FreeWheeler. Do not attempt to allocate fixed overhead.
b. Complete the income statement using the cost drivers recommended by the consultant.
c. How might activity-based costing result in better decisions by FreeWheeler management?
d. After hearing the consultant€™s recommendations, the CFO decided to adopt activity-based costing but expressed concern about not allocating some of the overhead (administration and other fixed overhead) to the products. In the CFO€™s view, €˜€˜Products have to bear a fair share of all overhead or we won€™t be covering all our costs.€™€™ How would you respond to thiscomment?

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FREEWHEELER, LTD. Income Statement For the Year Ended December 31, XXXX 5 Featherweight Peak Raider Total Sales Direct Costs $760,000 $1,120,000 $950,000 $2,830,000 Direct Materials Direct Labor . 300,000 28,800 480,000 48,000 400,000 108,000 1,180,000 184,800 Variable Overhead Machine Setup Order Processing_ Warehousing Costs Depreciation of Machines Shippinn Contribution Margin 52,000 128,000 186,000 84,000 72,000 $ 943,200 Fixed Overhead Plant Administration. Other Fixed Overhead 176,000 280,000 487,200 Operating Profit Activity Level Activity Cost Driver Featherweight Peak Raider Machine Setup Number of Production Runs Order Processing Number of Sales Orders Received Warehousing Costs Number of Units Held in Inventory Depreciation Machine Hours Shipping 16 400 200 10,000 1,000 28 600 200 16,000 4,000 36 600 400 24,000 10,000 Number of Units Shipped