Solved by verified expert :#1World 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 majorcost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantlyautomated 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 blendshave very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plusa markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustmentsare made. The company competes primarily on the quality of its products, but customers are priceconsciousas well.Data for the 20×1 budget include manufacturing overhead of $3,000,000, which has been allocatedon the basis of each product’s direct-labor cost. The budgeted direct-labor cost for 20×1 totals $600,000.Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffeebeans) will total $6,000,000.The expected prime costs for one-pound bags of two of the company’s products are as follows:Kona MalaysianDirect material …………………………………………………………………………………………………………….. $3.20 $4.20Direct labor …………………………………………………………………………………………………………………. .30 .30WGCC’s controller believes the traditional product-costing system may be providing misleadingcost information. She has developed an analysis of the 20×1 budgeted manufacturing-overhead costsshown in the following chart.Activity Cost Driver Budgeted Activity Budgeted CostPurchasing ………………………….. Purchase orders ……………………… 1,158 ………………… $ 579,000Material handling ………………….. Setups ………………………………….. 1,800 ………………… 720,000Quality control………………………. Batches …………………………………. 720 ………………… 144,000Roasting ……………………………… Roasting hours ………………………… 96,100 …………………. 961,000Blending ……………………………… Blending hours………………………… 33,600 …………………. 336,000Packaging …………………………… Packaging hours ……………………… 26,000 …………………. 260,000Total manufacturing-overhead cost …………………………………………………………………………………………. $3,000,000Data regarding the 20×1 production of Kona and Malaysian coffee are shown in the followingtable. There will be no raw-material inventory for either of these coffees at the beginning of the year.Kona MalaysianBudgeted sales ……………………………………………………………………………………….. 2,000 lb. 100,000 lb.Batch size ……………………………………………………………………………………………… 500 lb. 10,000 lb.Setups ………………………………………………………………………………………………….. 3 per batch 3 per batchPurchase order size …………………………………………………………………………………. 500 lb. 25,000 lb.Roasting time …………………………………………………………………………………………. 1 hr. per 100 lb. 1 hr. per 100 lb.Blending time …………………………………………………………………………………………. .5 hr. per 100 lb. .5 hr. per 100 lb.Packaging time ……………………………………………………………………………………….. .1 hr. per 100 lb. .1 hr. per 100 lb.Required:1. Using WGCC’s current product-costing system:a. Determine the company’s predetermined overhead rate using direct-labor cost as the singlecost driver.b. Determine the full product costs and selling prices of one pound of Kona coffee and onepound of Malaysian coffee.2. Develop a new product cost, using an activity-based costing approach, for one pound of Konacoffee and one pound of Malaysian coffee.3. What are the implications of the activity-based costing system with respect toa. The use of direct labor as a basis for applying overhead to products?b. The use of the existing product-costing system as the basis for pricing?_______________________________________________________________________________________________________________________________#2Bo Vonderweidt, the production manager for Sportway Corporation, had requested to have lunch withthe company president. Vonderweidt wanted to put forward his suggestion to add a new product line. Asthey finished lunch, Meg Thomas, the company president, said, “I’ll give your proposal some seriousthought, Bo. I think you’re right about the increasing demand for skateboards. What I’m not sure aboutis whether the skateboard line will be better for us than our tackle boxes. Those have been our bread andbutter the past few years.”Vonderweidt responded with, “Let me get together with one of the controller’s people. We’ll run afew numbers on this skateboard idea that I think will demonstrate the line’s potential.”Sportway is a wholesale distributor supplying a wide range of moderately priced sports equipmentto large chain stores. About 60 percent of Sportway’s products are purchased from other companieswhile the remainder of the products are manufactured by Sportway. The company has a Plastics Departmentthat is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture andsell 8,000 tackle boxes annually, making full use of its direct-labor capacity at available work stations.The selling price and costs associated with Sportway’s tackle boxes are as follows:Selling price per box ……………………………………………………………………………………………………… $86.00Costs per box:Molded plastic ………………………………………………………………………………………………………… $ 8.00Hinges, latches, handle …………………………………………………………………………………………….. 9.00Direct labor ($15.00 per hour) ……………………………………………………………………………………. 18.75Manufacturing overhead ……………………………………………………………………………………………. 12.50Selling and administrative cost ……………………………………………………………………………………. 17.00 65.25Profit per box ………………………………………………………………………………………………………………. $20.75Because Sportway’s sales manager believes the firm could sell 12,000 tackle boxes if it had sufficientmanufacturing capacity, the company has looked into the possibility of purchasing the tackle boxesfor distribution. Maple Products, a steady supplier of quality products, would be able to provide up to9,000 tackle boxes per year at a price of $68.00 per box delivered to Sportway’s facility.Bo Vonderweidt, Sportway’s production manager, has come to the conclusion that the companycould make better use of its Plastics Department by manufacturing skateboards. Vonderweidt has amarket study that indicates an expanding market for skateboards and a need for additional suppliers.Vonderweidt believes that Sportway could expect to sell 17,500 skateboards annually at a price of$45.00 per skateboard.After his lunch with the company president, Vonderweidt worked out the following estimates withthe assistant controller.Selling price per skateboard ………………………………………………………………………………………………. $45.00Costs per skateboard:Molded plastic …………………………………………………………………………………………………………… $5.50Wheels, hardware ………………………………………………………………………………………………………. 7.00Direct labor ($15.00 per hour) ………………………………………………………………………………………. 7.50Manufacturing overhead ………………………………………………………………………………………………. 5.00Selling and administrative cost ………………………………………………………………………………………. 9.00 34.00Profit per skateboard ………………………………………………………………………………………………………… $11.00In the Plastics Department, Sportway uses direct-labor hours as the application base for manufacturingoverhead. Included in the manufacturing overhead for the current year is $50,000 of factorywide,fixed manufacturing overhead that has been allocated to the Plastics Department. For each unit of productthat Sportway sells, regardless of whether the product has been purchased or is manufactured bySportway, there is an allocated $6.00 fixed overhead cost per unit for distribution that is included in theselling and administrative cost for all products. Total selling and administrative costs for the purchasedtackle boxes would be $10.00 per unit.Required:In order to maximize the company’s profitability, prepare an analysis that will show whichproduct or products Sportway Corporation should manufacture or purchase.1. First determine which of Sportway’s options makes the best use of its scarce resources. Howmany skateboards and tackle boxes should be manufactured? How many tackle boxes should bepurchased?2. Calculate the improvement in Sportway’s total contribution margin if it adopts the optimal strategyrather than continuing with the status quo.
