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Gigabyte, Inc. manufactures three products for the computer Industry: Gismos (product G): annual sales, 8,000 units Thingamajigs (product T): annual sales. 15,000 units Whatchamacallits (product W): annual sales, 4,000 units The company uses a traditional, volume-based product-costing system with manufacturing overhead applied on the basis of direct- labor dollars. The product costs have been computed as follows: Hav material Direct labor Nanufacturing overhead. Total product cost Product G $ 35.00 16.00 (.8 hr. at $20) 140.00 $191.00 Product $ 52.50 12.00 (.6 hr. at $20) 105.00 $169.50 Product W $17.50 8.00 (4 hr. at $20) 70.00 $95.50 *Calculation of predetermined overhead rate: Manufacturing overhead budget! Machine setup Machinery Inspection Material handling Engineering Total $ 5,250 1,225,000 525,000 875,000 344,750 $2.975,000 Direct-labor budget (based on budgeted annual sales): Product G! Product T: Product W: Total 8,000 $16.00 15,000 $12.00 4,000 x $ 8.00 - - = $129.000 180,000 32,000 $240,000 Predetermined overhead rate - Budgeted overhead Budgeted direct labor - 875 Predetermined overhead rate - Budapted direct labor - = 8755 Gigabyte's pricing method has been to set a target price equal to 150 percent of full product cost. However, only the thingamajigs have been selling at their target price. The target and actual current prices for all three products are the following: Product cost Target price Actual current selling price Product G $191.00 286.50 213.00 Product T $169.50 254.25 254.25 Product W $ 95.50 143.25 200.00 Gigabyte has been forced to lower the price of gismos in order to get orders. In contrast, Gigabyte has raised the price of whatchamacallits several times, but there has been no apparent loss of sales. Gigabyte, Inc. has been under increasing pressure to reduce the price even further on gismos. In contrast, Gigabyte's competitors do not seem to be interested in the market for whatchamacallits. Gigabyte apparently has this market to itself. Required: 1. Is product G the company's least profitable product? 2. Is product W a profitable product for Gigabyte, Inc.? 4. Gigabyte's controller, Nan O'Second, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Gigabyte's management to understand its product costs better. She got top management's approval to design an activity-based costing system, and an ABC project team was formed. In stage one of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then a cost driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of Gigabyte's product lines. These data are summarized as follows: Product W Activity Cost Pool Machine setup Machinery Inspection Material handling Engineering Product G Product 201 251 501 305 Cost Driver Number of setups Machine hours Number of inspections Raw-material costs Number of change orders 450 25% 408 255 355 694 104 55% Show how the controller determined the percentages given above for raw material costs. 5. Develop product costs for the three products on the basis of an activity-based costing system. 6. Based on your answers in the above requirement, calculate a target price for each product, using Gigabyte's pricing formula. Show how the controller determined the percentages given in requirement 4 for raw-material costs. (Round Percentage of Total Raw Material Cost to the nearest whole percentage. Round other answers to 2 decimal places.) Product Raw-Material Cost per Unit Annual Volume Annual Raw- Material Cost Percentage of Total Raw- Material Cost W Total Develop product costs for the three products on the basis of an activity-based costing system. (Round intermediate and final answers to 2 decimal places.) Product Product T Product W Direct material Direct labor Machine setup Machinery Inspection Material handling Engineering Total i $ 0.00 $ 0.00 $ 0.00 Based on your answers in the above requirement, calculate a target price for each product, using Gigabyte's pricing formula. (Round your intermediate calculations and final answers to 2 decimal places.) Product Product T Product W new product costs Product & Product Product W Target price based on new product costs
