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Shady Lady

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Shady Lady sells window coverings (shades, blinds, and awnings) to both commercial
and residential customers. The following information relates to its budgeted operations
for the current year.


   Commercial     Residential 
Revenues   300,000  480,000
Direct material costs   30,000  50,000
Direct labor costs   100,000  300,000
Overhead costs   85,000  215,000  150,000  500,000
Operating income (loss)   85,000  (20,000)

The controller, Peggy Kingman, is concerned about the residential product line. She
cannot understand why this line is not more profitable given that the installations of
window coverings are less complex for residential customers. In addition, the residential
client base resides in close proximity 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. Here are the three activity cost
pools and related information she developed:


  Estimated Overhead  Cost Drivers 
Scheduling and travel  $105,000 Hours of travel 
Setup time  70,000 Number of setups 
Supervision  60,000 Direct labor cost 
  Commercial  Residential 
Scheduling and travel  1,000 500
Setup time  450 250

Instructions
(a) Compute the activity-based overhead rates for each of the three cost pools, and determine
the overhead cost assigned to each product line.
(b) Compute the operating income for each product line, using the activity-based overhead
rates.

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