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 20,000 Deluxe Model 1,000 Heavy-Duty Model 10,000 Raw material $ 10 $ 25 $ 42 Direct labor 10 (0.5 hr. at $20) Manufacturing overhead* 85 20 (1 hr. at $20) 170 20 (1 hr. at $20) 170 Total product cost $ 105 $ 215 $ 232 *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: 10,000 hours Deluxe model: 1,000 hours Heavy-duty model: 10,000 hours Total 21,000 hours. $1,480,000 120,000 300,000 350,000 250,000 375,000 400,000 295,000 $3,570,000 Predetermined overhead rate: Budgeted overhead Budgeted direct-labor hours $3,570,000 21,000 hours $170 per hour For the past 10 years, the company's pricing formula has been to set each product's target price at 110 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 $110. 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 106 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. 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 Required: Standard Product Lines Deluxe Heavy-Duty Cost Driver Model Model Model Machine time 40% 13% 47% Engineering hours 47% 6% 47% Number of material orders 47% 8% 45% Factory space usage 42% 15% 43% 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. (For all requirements, round your intermediate calculations and final answers to 2 decimal places.) Standard Model Deluxe Model Heavy-Duty Model 1. Target price 2. New product cost 3. New target price $ 115.50 $ 236.50 $ 255.20