Case 5-68 Traditional versus Activity-Based Costing Systems (LO 5-1, 5-2,5-3,5-4, 5-5) 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: Annual sales (units) Product costs: Standard Model 22,000 Deluxe Model 1,500 Heavy-Duty Model 11,000 24 (1 hr. at $24) Raw material $ 14 $ 29 $ 40 Direct labor 12 (0.5 hr. at $24) Manufacturing overhead* 55 24 (1 hr. at $24) 110 110 Total product cost $ 81 $ 163 $ 174 *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 Direct-labor budget: Standard model: 12,000 hours Deluxe model: 4,000 hours Heavy-duty model: 12,000 hours Total 28,000 hours Predetermined overhead rate: $1,300,000 130,000 220,000 260,000 210,000 300,000 400,000 260,000 $3,080,000 Budgeted overhead Budgeted direct-labor hours $3,080,000 28,000 hours = $110 per hour For the past 10 years, the company's pricing formula has been to set each product's target price at 120 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 $120.