Gourmet Gifts prepares cheese, bread, and fruit gift baskets for sale from the company's Web site. The company obtains these products from several vendors. Customers select items for their customized gift baskets on Gourmet Gifts Web site, and then Gourmet Gifts assembles and decorates the baskets to order. Workers earn $21 per hour, and they prepare an average of 3 baskets per hour. For pricing. Gourmet Gifts determines the full "product cost" of each basket and then adds a profit margin that equals 20% of the full product cost. Indirect costs. including supervisors' and quality inspectors' wages, spoilage. Web site support, rent, and utilities, are allocated to baskets based on direct food costs. Gourmet Gifts president Jennifer Wildt wants to grow the company by targeting corpo- rate customers who would place large orders for many identical baskets. But she believes the company does not have the resources to finance such expansion. She is discussing the issue with controller Jay Boros and cost accountant Ling Chen, who has just returned from an e-commerce seminar. Chen suggests that Gourmet Gifts use an e-commerce software provider and use the Web to connect electronically with its main vendors. Gourmet Gifts could then order food items as needed for next-day delivery, avoiding the cost of holding a larger inven- tory and the associated spoilage. Wildt likes Chen's suggestion. Wildt also expects that filling many baskets with the same items should cut the direct labor time per basket in half. Boros and Chen calculate the following cost estimates, assuming that in addition to the 10,000 bas- kers currently sold to individuals, the company would sell 6.000 baskets to corporate clients. Direct materials Direct labor Indirect costs: Supervisors' and quality inspectors' wages.. Spoilage.... Web site support Rent and utilities. Total indirect costs. Total costs 16,000 Baskets $480,000 91.000 $64,000 27.500 17.000 28,000 136.500 $707.500 When Chen calculates the average cost per basket, all are surprised that the cost sav- ings for the corporate sales are not as large as expected. At the estimated cost of approxi- mately $42.03. Gourmet Gifts might not be able to attract corporate customers. Controller Jay Boros suggests changing the indirect cost allocation base from direct materials cost to direct labor cost. Wildt is skeptical because the firm has always used direct materials cost as the allocation base, and the last thing she wants is to have individual sales subsidize corpo- rate sales. Required Form groups of three students for a role-play. The first person assumes the role of Gourmet Gifts president Jennifer Wildt. Before the meeting, prepare a written report that costs baskets sold to individuals using

(a) direct materials cost, and

(b) direct labor cost as the indirect cost allocation base. Also, estimate the selling price under each allocation base. Carry computations of the indirect cost allo- cation rate to four decimal places. Prepare arguments supporting direct materials cost as the cost allocation base. The second person assumes the role of cost accountant Ling Chen. Before the meeting. prepare a written report that costs baskets sold to corporate customers using

(a) direct materials cost, and

(b) direct labor cost as the indirect cost allocation base. Estimate the selling price under each allocation base. Carry computations of the indirect cost alloca- tion rate to four decimal places. Prepare arguments supporting direct labor cost as the cost allocation base. The third person assumes the role of controller Jay Boros. Before the meeting, prepare a written report on the factors GourmetGifts should consider in identifying a cost alloca tion base. During the meeting, the three team members decide which cost allocation base is best for GourmetGifts and what additional information, if any, would help in making this decision.