Reference no: EM131578139

Assignment

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

Revenues	Commercial		Residential
Revenues		$300,000		$480,000
Direct materials costs	$ 30,000		$ 50,000
Direct labor costs	100,000		300,000
Overhead costs	89,000	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 arc the three activity cost pools and related information she developed:

Activity Cost Pools	Estimated Overhead	Cost Drivers
Scheduling and travel	$85,000	Hours of travel
Setup time	90,000	Number of setups
Supervision	60,000	Direct labor cost

Expected Use of Cost Drivers per Product
	Commercial	Residential
Scheduling and travel	750	500
Scheduling and travel	350	250

Instructions

(a) Compute the activity-based overhead rates for each of the three cost pools, and deter. mine the overhead cost assigned to each product line.

(b) Compute the operating income for each product line, using the activity-based over-head rates.

(c) What do you believe Peggy Kingman should do?