Best Brew Coffee, Inc., makes single-serve coffee pots that use coffee pods. It has become very popular. Even though the cost per cup is greater than for brewed coffee, the freshness and variety continue to appeal to customers. It makes four different models of coffee pots on a cellular manufacturing line. Current costs are charged as direct materials to each type of pot, and then the rest of the manufacturing costs are charged evenly to good units produced. Total labor and overhead for the cell is currently $3,010,000. The data on the four models of coffee pots made this last year are:

Recently, there have been many discussions between the product line managers about these units. While right now they are all being charged the same manufacturing cost, the products use very different amounts of support activities. Of the $3,010,000 in labor and overhead, $1,610,000 is overhead for support activities that are done while the cell is producing output. The activities performed, their costs, and how each product uses these services is contained in the following table.

REQUIRED:

a. Determine the cost per good unit produced for labor and overhead.

b. Using the normal cellular costing approach, determine the cost per good unit produced. Specifically, charge materials directly to unit; then charge each output unit the same amount of labor and overhead based on your answer to (a).

c. Develop activity- based rates for all of the activities listed here. Also develop a rate for labor in the cell, which is still charged out on good units produced as noted in the table.

d. Now create a cost per total amount of each type of coffee pot made using your ABC information.

e. What does it cost per unit of coffee pot now? In other words, divide the solution to (d) by the total units of each type made.

f. If the target costs for the various products are those described in the following table, what is the cost gap for the original vs. revised estimate for each coffee pot?

g. What recommendations would you make to Best Brew’s management?

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Best Brew Coffee, Inc. Model 100 Model 150 Model 200 Model 500 Materidls costs $75.00 $90.00 $120.00 $150.00 Good units made 25,000 40,000 60,000 15,000