Marathon, Inc., manufactures two types of shoes: X-Trainer and Court. Last year, Marathon had the following costs and revenues:

Marathon, Inc., 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 cost drivers to allocate the remaining overhead:

a. Complete the income statement using the cost drivers above.
b. Write a report indicating how management might use activity-based costing to reduce costs.
c. Restate the income statement for Marathon using direct labor costs as the only overhead allocation base.
d. Write a report to management stating why product-line profits differ using activity-based costing compared with the traditional approach. Indicate whether activity-based costing provides more accurate information and, if so, how. Indicate in your report how the use of labor-based overhead allocation could result in Marathon management making suboptimaldecisions.

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MARATHON, INC. Income Statement For the Year Ended December 31, Xxxx Total Revenue Direct Materials Direct Labor Indirect Costs: Court $800,000 100,000 360,000 X-Trainer $720,000 100,000 240,000 $1,520,000 200,000 600,000 Administration Production Setup Quality Control Sales and Marketing 100,000 160,000 150,000 60,000 250,000 Operating Profit Activity Level X-Trainer 450 400 100 Cost Driver Court Activity Production Setup Quality Control Sales and Marketing Number of Production Runs Number of Inspections Number of Advertisements 300 600 100