Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models: a cruising
ID: 2357473 • Letter: P
Question
Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models: a cruising bike (Route 66), a street bike (Main Street), and a starter model (Alley Cat). Because of the different materials used, production processes for each model differ signifcantly in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of bike is similar. For this reason, PMI allocates overhead on the basis of machine-hours. Last year, the company shipped 1,000 Route 66s, 4,000 Main Streets, and 10,000 Alley Cats and had the following revenues and expenses: PICKLE MOTORCYCLES,INC. Income Statement Route 66 Main Street Alley Cat Total Sales . . . . . . . . . . . . . . . . . . . . $7,600,000 $11,200,000 $9,500,000 $28,300,000 Direct costs Direct materials. . . . . . . . . . . 3,000,000 4,800,000 4,000,000 11,800,000 Direct labor. . . . . . . . . . . . . . 288,000 480,000 1,080,000 1,848,000 Variable overhead Machine setup. . . . . . . . . . . 520,000 Order processing. . . . . . . . . 1,280,000 Warehousing costs. . . . . . . . 1,860,000 Energy to run machines. . . . 840,000 Shipping. . . . . . . . . . . . . . . . 720,000 __________ Contribution margin. . . . . . . . . $9,432,000 Fixed overhead Plant administration. . . . . . . 1,760,000 Other fxed overhead. . . . . . 2,800,000 __________ Gross proft . . . . . . . . . . . . . . . . $4,872,000 __________ __________ Page 317 318 Chapter 9 Activity-Based Costing PMIExplanation / Answer
Activity Level ActivityCost Driver Route 66 Main Street Alley Cat Setting up machines . . Number of production runs 223 444 Processing orders . . . Number of sales orders received 400 600 600 Warehousing . . . . . . . Number of units held in inventory 200 200 400 Using energy. . . . . . . Machine-hours10000 16,000 24,000 Shipping. . . . . . . . . . . Number of units shipped1,000 4,000 10,000 The consultant found no basis for allocating the plant administration and other fixed overhead costs and recommended that these not be applied to products