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 one-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 percent. 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 2010 budget include factory overhead of $3,000,000, which has been allocated by its current costing system on the basis of each product's direct labor cost. The budgeted direct labor cost for 2010 totals $600,000. The firm budgeted $6,000,000 for purchases and use of direct materials (mostly coffee beans). The budgeted direct costs for one-pound bags of two of the company's products are as follows:

 

	Mona Loa	Malaysian
Direct Materials	$4.20	$3.20
Direct Labor (hours)	0.30	0.30

Normal mark-up percentage =   30%        over full cost

CBI's controller developed the followed budgeted overhead cost information for 2010:

 

Activity	Cost Driver	Budgeted Activity	Budgeted Cost
Purchasing	Purchase orders	1,158	$579,000
Materials handling	Setups	1,800	$720,000
Quality control	Batches	720	$144,000
Roasting	Roasting-hours	96,100	$961,000
Blending	Blending-hours	33,600	$336,000
Packaging	Packaging-hours	26,000	$260,000
TOTAL factory overhead cost			$3,000,000
Direct Labor Budget			$600,000
Direct materials budget			$6,000,000

Data regarding the 2010 production of two of its lines, Mona Loa and Malaysian, follow. There is no beginning or ending

DM inventory for either of these coffees.

 

	Mona Loa	Malaysian
Budgeted Sales (pounds)	100,000	2,000
Batch size (pounds)	10,000	500
Setups (batch)	3	3
Purchase order size (pounds)	25,000	500
Roasting time (hours per 100 lbs.)	1.00	1.00
Blending time (hours per 100 lbs.)	0.50	0.50
Packaging time (hours per 100 lbs.)	0.10	0.10

Required

1. Using Coffee Bean Inc.'s current product costing system,

a. Determine the company's predetermined overhead rate using direct labor cost as the single cost driver.

b. Determine the full product costs and selling prices of one pound of Mona Loa coffee and one pound of Malaysian coffee.

2. Using an activity-based costing approach, develop a new product cost for one pound of Mona Loa coffee and one pound of Malaysian coffee. Allocate all overhead costs to the 100,000 pounds of Mona Loa and the 2,000 pounds of Malaysian. Compare the results with those in requirement 1.

3. What are the implications of the activity-based costing system with respect to CBI's pricing and product mix strategies? How does ABC add to CBI's competitive advantage?