Problem 1. Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon, Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie molds owned by the company. Based on budgetary projections, the information listed below is available:

                                                                                    Macaroon                    Sugar      Buttercream

Projected sales in units                                                      500,000                 800,000         600,000

PER UNIT data:

Selling price                                                                       $0.80                      $0.75             $0.60

Direct materials                                                                 $0.20                      $0.15             $0.14

Direct labor                                                                       $0.04                      $0.02             $0.02

Hours per 1000-unit batch:

Direct labor hours                                                                   2                              1                     1

Oven hours                                                                            1                              1                     1

Packaging hours                                                                    0.5                          0.5                  0.5

Total overhead costs and activity levels for the year are estimated as follows:

        Activity                          Overhead costs                                    Activity levels

        Direct labor                                                                           2,400 hours

        Oven                                  $210,000                                     1,900 oven hours

        Packaging                            $150,000                                   950 packaging hours

                                                   $360,000

Required:

1.Suppose Aunt Ethel's uses direct labor hours to allocate all overhead costs. Prepare product line and total company income statements.

2.Identify an improved method for allocating costs to the three product lines. Explain. Use the method that you propose to prepare new product line and total company income statements.

3.Compare your results for requirement 1 and 2 and write a brief memo to Aunt Ethel's management describing how the improved system might be useful for managing the production costs of the cookies.