1. Compute the target prices for the three models, based on the traditional, volume-based product-costing system. 2. Compute new product costs for the three products, based on the new data collected by the controller. 3. Calculate a new target price for the three products, based on the activity-based costing system.

Morelli Electric Motor Corporation manufactures electric motors for commercial use. The company produces three models, designated as standard, deluxe, and heavy-duty. The company uses a job-order cost-accounting system with manufacturing overhead applied on the basis of direct-labor hours. The system has been in place with little change for 25 years. Product costs and annual sales data are as follows: Standard Model 21,000 Deluxe Model 1,200 Heavy-Duty Model 9,200 Annual sales (units) Product costs: Raw material Direct labor Manufacturing overhead Total product cost $ 15 8 (0.5 hr. at $16) 55 $ 78 $ 30 16 (1 hr. at $16) 110 $ 156 $ 50 16 (1 hr. at $16) 110 $ 176 *The calculation of the predetermined overhead rate is as follows: Manufacturing-overhead budget: Depreciation, machinery Maintenance, machinery Depreciation, taxes, and insurance for factory Engineering Purchasing, receiving and shipping Inspection and repair of defects Material handling Miscellaneous manufacturing overhead costs Total $1,340,800 120,000 230,000 310,000 260,000 360,000 450,000 230,000 $3,300,000 Direct-labor budget: Standard model: Deluxe model: Heavy-duty model: Total 14,800 hours 2,800 hours 14,800 hours 30,000 hours Predetermined overhead rate: Budgeted overhead Budgeted direct-labor hours $3,300,000 30,000 hours = $110 per hour For the past 10 years, the company's pricing formula has been to set each product's target price at 130 percent of its full product cost. Recently, however, the standard-model motor has come under increasing price pressure from offshore competitors. The result was that the price on the standard model has been lowered to $130. The company president recently asked the controller, "Why can't we compete with these other companies? They're selling motors just like our standard model for 119 dollars. That's only a buck more than our production cost. Are we really that inefficient? What gives?" The controller responded by saying, "I think this is due to an outmoded product-costing system. As you may remember, I raised a red flag about our system when I came on board last year. But the decision was to keep our current system in place. In my judgment, our product-costing system is distorting our product costs. Let me run a few numbers to demonstrate what I mean." Getting the president's go-ahead, the controller compiled the basic data needed to implement an activity-based costing system. These data are displayed in the following table. The percentages are the proportion of each cost driver consumed by each product line. Product Lines Deluxe Heavy-Duty Model Model Standard Model Cost Driver Machine time 42% 12% 46% Activity Cost Pool I. Depreciation, machinery Maintenance, machinery II. Engineering Inspection and repair of defects III. Purchasing, receiving, and shipping Material handling IV. Depreciation, taxes, and insurance for factory Miscellaneous manufacturing overhead Engineering hours 46% 8% 46% Number of material orders 46% 10% 44% Factory space usage 44% 11% 45% Morelli Electric Motor Corporation manufactures electric motors for commercial use. The company produces three models, designated as standard, deluxe, and heavy-duty. The company uses a job-order cost-accounting system with manufacturing overhead applied on the basis of direct-labor hours. The system has been in place with little change for 25 years. Product costs and annual sales data are as follows: Standard Model 21,000 Deluxe Model 1,200 Heavy-Duty Model 9,200 Annual sales (units) Product costs: Raw material Direct labor Manufacturing overhead Total product cost $ 15 8 (0.5 hr. at $16) 55 $ 78 $ 30 16 (1 hr. at $16) 110 $ 156 $ 50 16 (1 hr. at $16) 110 $ 176 *The calculation of the predetermined overhead rate is as follows: Manufacturing-overhead budget: Depreciation, machinery Maintenance, machinery Depreciation, taxes, and insurance for factory Engineering Purchasing, receiving and shipping Inspection and repair of defects Material handling Miscellaneous manufacturing overhead costs Total $1,340,800 120,000 230,000 310,000 260,000 360,000 450,000 230,000 $3,300,000 Direct-labor budget: Standard model: Deluxe model: Heavy-duty model: Total 14,800 hours 2,800 hours 14,800 hours 30,000 hours Predetermined overhead rate: Budgeted overhead Budgeted direct-labor hours $3,300,000 30,000 hours = $110 per hour For the past 10 years, the company's pricing formula has been to set each product's target price at 130 percent of its full product cost. Recently, however, the standard-model motor has come under increasing price pressure from offshore competitors. The result was that the price on the standard model has been lowered to $130. The company president recently asked the controller, "Why can't we compete with these other companies? They're selling motors just like our standard model for 119 dollars. That's only a buck more than our production cost. Are we really that inefficient? What gives?" The controller responded by saying, "I think this is due to an outmoded product-costing system. As you may remember, I raised a red flag about our system when I came on board last year. But the decision was to keep our current system in place. In my judgment, our product-costing system is distorting our product costs. Let me run a few numbers to demonstrate what I mean." Getting the president's go-ahead, the controller compiled the basic data needed to implement an activity-based costing system. These data are displayed in the following table. The percentages are the proportion of each cost driver consumed by each product line. Product Lines Deluxe Heavy-Duty Model Model Standard Model Cost Driver Machine time 42% 12% 46% Activity Cost Pool I. Depreciation, machinery Maintenance, machinery II. Engineering Inspection and repair of defects III. Purchasing, receiving, and shipping Material handling IV. Depreciation, taxes, and insurance for factory Miscellaneous manufacturing overhead Engineering hours 46% 8% 46% Number of material orders 46% 10% 44% Factory space usage 44% 11% 45%