(d) Smithson, Inc. decided to implement the activity-based costing approach and was quite successful in its use. However, the controller is wondering if instead of only two activity cost pools, they should expand to three activity cost pools based on the following:

Family Model Deluxe Model

Direct Labor Cost $75,000 $150,000

Machine Hours 2,000 2,000

Setup Hours 200 800

Packaging Hours 50 75

Total Estimated Overhead Costs $450,000

Overhead Cost Allocated to the machining activity $240,000

Overhead allocated to the machine setup activity $170,000

Overhead allocated to packaging activity $40,000

(1) Determine the overhead rates using the activity-based costing approach with three cost pools.

(2) Calculate the overhead allocation for the family model and the deluxe model using three activity cost pools. What is the difference in allocation between two activity cost pools and three activity cost pools? Is the difference in allocation worth using the third activity cost pool?