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 20 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 $17,021,280, which has been allocated on the basis of each product's direct-labor cost. The budgeted direct-labor cost for 20x1 totals $1,702,128. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $6,700,000. The expected prime costs for one-pound bags of two of the company's products are as follows: Direct material Direct labor Kona $ 3.80 0.70 Malaysian $4.80 0.70

Answer 1

1a. Predetermined overhead rate = Budgeted manufacturing overhead/Budgeted direct labor cost = $17021280/$1702128 = $10 per direct-labor dollar

b.

	Kona		Malaysian
Full product cost per pound	$                   11.50	per pound	$               12.50	per pound
Selling price per pound	$                   13.80	per pound	$               15.00	per pound

Working:

	Kona	Malaysian
Direct material	3.80	4.80
Direct labor	0.70	0.70
Manufacturing overheads	7.00	7.00
Full product cost per pound $	11.50	12.50
Mark-up 20%	2.30	2.50
Selling price per pound $	13.80	15.00

2.

	New Product Cost
Kona coffee	$                     9.67	per pound
Malaysian coffee	$                     6.14	per pound

Working:

Activity	Budgeted Cost $	Budgeted Activity	Activity Rate $	Kona		Malaysian
				Activity Usage	Allocated Cost $	Activity Usage	Allocated Cost $
Purchasing	2998380	2541	1180	4	4720.00	2	2360.00
Material handling	3702600	3960	935	12	11220.00	15	14025.00
Quality control	793800	1620	490	4	1960.00	5	2450.00
Roasting	5834800	201200	29	38	1102.00	1090	31610.00
Blending	2053200	70800	29	19	551.00	545	15805.00
Packaging	1638500	56500	29	3.8	110.20	109	3161.00
Total manufacturing overhead	17021280				19663.20		69411.00
Number of pounds					3800		109000
Manufacturing overhead per pound					5.17		0.64

	Kona	Malaysian
Direct material	3.80	4.80
Direct labor	0.70	0.70
Manufacturing overhead	5.17	0.64
Total cost per pound $	9.67	6.14