Shady Lady sells window coverings to both commercial and residential customers. The following information relates to its budgeted operations for the current year:

The controller, Susan Chan, is concerned about the residential product line. She cannot understand why this line is not more profitable given that window coverings are less complex to install for residential customers. In addition, the residential client base resides close to the company office, so travel costs are not as expensive on a per-client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Following are the three activity cost pools and related information she developed:

Instructions
(a) Calculate the activity-based overhead rates for each of the three cost pools, and determine the overhead cost assigned to each product line.
(b) Calculate the operating income for each product line, using the activity-based overhead rates.
(c) What do you believe Susan Chan should do?

Transcribed Image Text:

Commercial Residential $300,000 s 70,000 Revenues Direct material costs Direct labour costs Overhead costs Operating income (loss) $30,000 100,000 55,000 300,000 162,000 185,000 $115,000 532,000 $ (52,000) Activity Cost Pools Scheduling and travel Set-up time Supervision Estimated Overhead $84,000 77,000 56,000 Expected Use of Cost Drivers per Product Commercial Residential Cost Drivers Hours of travel Number of set-ups Direct labour cost Scheduling and travel Set-up time 1,000 450 680 250