Question

Coffee Bean Inc. (CBI) processes and distributes a variety of coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently, the firm offers 15 coffees to gourmet shops in 1-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred 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; a few of the newer brands have very low volumes. CBI prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. If its prices for certain coffees are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well.

Data for the current budget include factory overhead of $2,500,000, which has been allocated on the basis of each product’s direct labor cost. The budgeted direct labor cost for the current year totals $595,000. The firm budgeted $5,500,000 for purchase and use of direct materials (mostly coffee beans).

The budgeted direct costs for 1-pound bags of two of the company’s many products are as follows:

	Mona Loa			Malaysian
Direct materials	$	4.20		$	3.20
Direct labor		0.30			0.30

CBI’s controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current year’s budgeted factory overhead costs:

Activity	Cost Driver	Budgeted Activity			Budgeted Cost
Purchasing	Purchase orders		1,108		$	574,000
Materials handling	Setups		1,750			715,000
Quality control	Batches		670			139,000
Roasting	Roasting hours		95,600			956,000
Blending	Blending hours		33,100			331,000
Packaging	Packaging hours		25,500			255,000
Total factory overhead cost					$	2,970,000

Data regarding the current year’s production of just two of its lines, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees.

	Mona Loa	Malaysian
Budgeted sales	100,500 pounds	1,950 pounds
Batch size	9,500 pounds	450 pounds
Setups	3 per batch	3 per batch
Purchase order size	24,500 pounds	450 pounds
Roasting time	1 hour per 100 pounds	1 hour per 100 pounds
Blending time	0.5 hour per 100 pounds	0.5 hour per 100 pounds
Packaging time	0.1 hour per 100 pounds	0.1 hour per 100 pounds

Using Coffee Bean Inc.’s current product costing system, determine the full product costs and selling prices of one pound of Mona Loa coffee and one pound of Malaysian coffee. (Round your answers to 2 decimal places.)

	Mona Loa Malaysian Product costs Budgeted selling price per pound

Using an activity-based costing approach, develop a new product cost for 1 pound of Mona Loa coffee and 1 pound of Malaysian coffee. Allocate all overhead costs to the 100,500 pounds of Mona Loa and the 1,950 pounds of Malaysian. (Round intermediate calculations to 2 decimal places.)

	Mona Loa Coffee Malaysian Coffee Direct unit costs: Direct materials $4.20 $3.20 Direct labor 0.30 $4.50 0.30 $3.50 Indirect unit costs: Purchasing Material handling Quality control Roasting Blending Packaging Total unit cost $4.50 $3.50

Answer 1