Question

World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly automated roasting and packing process. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 25 percent. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price-conscious as well.

Data for the 20x1 budget include manufacturing overhead of $22,560,960, which has been allocated on the basis of each product’s direct-labor cost. The budgeted direct-labor cost for 20x1 totals $2,256,096. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $7,600,000.

The expected prime costs for one-pound bags of two of the company’s products are as follows:

	Kona			Malaysian
Direct material	$	3.10		$	4.10
Direct labor		0.40			0.40

WGCC’s controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs shown in the following chart.

Activity	Cost Driver	Budgeted Activity				Budgeted Cost
Purchasing	Purchase orders		2,766			$	3,761,760
Material handling	Setups		4,320				4,622,400
Quality control	Batches		1,800				1,044,000
Roasting	Roasting hours		210,200				7,987,600
Blending	Blending hours		74,400				2,827,200
Packaging	Packaging hours		61,000				2,318,000
Total manufacturing-overhead cost						$	22,560,960

Data regarding the 20x1 production of Kona and Malaysian coffee are shown in the following table. There will be no raw-material inventory for either of these coffees at the beginning of the year.

	Kona		Malaysian
Budgeted sales	5,600	lb.	118,000	lb.
Batch size	1,400	lb.	23,600	lb.
Setups	3	per batch	3	per batch
Purchase order size	1,400	lb.	59,000	lb.
Roasting time	1	hr. per 100 lb.	1	hr. per 100 lb.
Blending time	0.5	hr. per 100 lb.	0.5	hr. per 100 lb.
Packaging time	0.1	hr. per 100 lb.	0.1	hr. per 100 lb.

Develop a new product cost, using an activity-based costing approach, for one pound of Kona coffee and one pound of Malaysian coffee. (Round your intermediate calculations and final answers to 2 decimal places.)

	New Product Cost Kona coffee    per pound Malaysian coffee per pound

Answer 1