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Problem 9-69 (Algo) Choosing an Activity-Based Costing System (LO 9-3, 5, 6)

Commonwealth Devices makes three wearable fitness devices at its Lake Plant: CFit-1, CFit-2, and CFit-Xtra. The company has for many years allocated overhead to products using machine-hours. Last year, the Lake Plant produced and shipped 8,340 units of CFit-1, 15,020 units of CFit-2, and 8,340 units of CFit-Xtra. The plant recorded the following revenues and costs:

COMMONWEALTH DEVICES
Lake Plant
Income Statement
	CFit-1	CFit-2	CFit-Xtra	Total
Sales revenue	$ 917,400	$ 1,502,000	$ 1,251,000	$ 3,670,400
Direct costs
Direct materials	226,000	314,000	274,000	814,000
Direct labor	74,000	86,500	154,000	314,500
Variable overhead
Machine setup				226,000
Order processing				178,000
Materials handling				226,000
Machining				130,000
Shipping				123,000
Contribution margin				$ 1,658,900
Plant administration costs				1,434,000
Gross profit				$ 224,900

The Lake Plant has put together an employee team to recommend a possible activity-based cost system, including cost allocation bases. The employee team recommends the following:

Activity	Cost Driver	CFit-1	CFit-2	CFit-Xtra
Machine setup	Setups	80	160	160
Order processing	Orders received	9	20	11
Materials handling	Material movements	3,000	4,500	5,000
Machining	Machine-hours	10,000	16,000	24,000
Shipping	Units shipped	8,000	14,000	8,000

The employee team further recommends that administration costs not be allocated to products.

Required:

a. Using machine-hours to allocate overhead, complete the income statement for the Lake Plant. Do not allocate administrative costs to products.

b-1. Compute the cost driver rates.

b-2. Complete the income statement using the activity-based costing method suggested by the employee team.

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