Worrall, Inc., produces two types of peanut butter: Smooth and Crunchy. Of the two, Smooth is the more popular. Data concerning the two products follow:

aPractical capacity less expected usage (all unused capacity is permanent).
bIn some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necessary. The cost per step is the fixed activity rate multiplied by the step units. The fixed activity rate is the expected fixed activity costs divided by practical activity capacity. Annual overhead costs are as follows. These costs are classified as fixed or variable with respect to the appropriate activity driver.

aCosts associated with practical activity capacity. The machine fixed costs are all depreciation.
bThese costs are for the actual levels of the cost driver.
Required:
1. Prepare functional- and activity-based segmented income statements. In the functional- based system, a unit-level overhead rate is used, based on direct labor hours.
2. Using a functional-based approach, determine whether the Crunchy peanut butter product line should be kept or dropped.
3. Repeat the keep-or-drop analysis using an ABCapproach.

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Unused Units of Crunchy Capacity Purchase* Smooth Expected sales (in cases) Selling price per casc Direct labor hours Machine hours Receiving orders Packing orders Material cost per case Direct labor cost per case Advertising costs 50,000 $100 40,000 10,000 500 1,000 S50 $10 $200,000 $80 _ As needed 2,500 500 250 1 2,500 250 500 $48 8 $60,000 250 500 Activity Fixe Variable Direct labor benefits Machine Receiving Packing 200,000 200,000 100,000 S500,000 $200,000 250,000 22,500 45,000 $517,500 Total costs