Koontz Company manufactures two models of industrialcomponents—a Basic model and an Advanced Model. The companyconsiders all of its manufacturing overhead costs to be fixed andit uses plantwide manufacturing overhead cost allocation based ondirect labor-hours. Koontz’s controller prepared the segmentedincome statement that is shown below for the most recent year (heallocated selling and administrative expenses to products based onsales dollars):

	Basic			Advanced			Total
Number of units produced andsold		20,000			10,000		30,000
Sales	$	3,000,000		$	2,000,000	$	5,000,000
Cost of goods sold		2,300,000			1,350,000		3,650,000
Gross margin		700,000			650,000		1,350,000
Selling and administrativeexpenses		720,000			480,000		1,200,000
Net operating income (loss)	$	(20,000	)	$	170,000	$	150,000

Direct laborers are paid $20 per hour. Direct materials cost $40per unit for the Basic model and $60 per unit for the Advancedmodel. Koontz is considering a change from plantwide overheadallocation to a departmental approach. The overhead costs in thecompany’s Molding Department would be allocated based onmachine-hours and the overhead costs in its Assembly and PackDepartment would be allocated based on direct labor-hours. Toenable further analysis, the controller gathered the followinginformation:

	Molding			Assemble and Pack			Total
Manufacturing overheadcosts	$	787,500		$	562,500	$	1,350,000
Direct labor hours:
Basic		10,000			20,000		30,000
Advanced		5,000			10,000		15,000
Machine hours:
Basic		12,000			-		12,000
Advanced		10,000			-		10,000

Required:

3. Koontz’s production manager has suggested usingactivity-based costing instead of either the plantwide ordepartmental approaches. To facilitate the necessary calculations,she assigned the company’s total manufacturing overhead cost tofive activity cost pools as follows:

Activity Cost Pool	Activity Measure	Manufacturing Overhead
Machining	Machine-hours inMolding	$	417,500
Assemble and pack	Direct labor hours in Assembleand Pack		282,500
Order processing	Number of customer orders		230,000
Setups	Setup hours		340,000
Other (unused capacity)			80,000
		$	1,350,000

She also determined that the average order size for the Basicand Advanced models is 400 units and 50 units, respectively. Themolding machines require a setup for each order. One setup hour isrequired for each customer order of the Basic model and three hoursare required to setup for an order of the Advanced model.

The company pays a sales commissions of 5% for the Basic modeland 10% for the Advanced model. Its traceable fixed advertisingcosts include $150,000 for the Basic model and $200,000 for theAdvanced model. The remainder of the company’s selling andadministrative costs are organization-sustaining in nature.

Using the additional information provided by the productionmanager, calculate:

a. An activity rate for each activity cost pool.

b. The total manufacturing overhead cost allocated to the Basicmodel and the Advanced model using the activity-based approach.

c. The total selling and administrative cost traced to the Basicmodel and the Advanced model using the activity-based approach.

4. Using your activity-based cost assignments from requirement3, prepare a contribution format segmented income statement that isadapted from Exhibit 7-8. (Hint: Organize all of the company’scosts into three categories: variable expenses, traceable fixedexpenses, and common fixed expenses.)

5. Using your contribution format segmented income statementfrom requirement 4, calculate the break-even point in dollar salesfor the Advanced model.