Case 5-69 Traditional versus Activity-Based Costing Systems (LO 5-1, 5-2, 5-3, 5-4, 5-5) Madison Electric Pump Corporation manufactures electric pumps for commercial use The company produces three models, designated as regular, advanced, and deluxe. 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 Regular Model Advanced Model 1,700 Deluxe Model 12,100 Annual sales (units)23,500 Product costs $ 27 $ 85 $126 Direct material Direct labor Manufacturing 54 2 hr. at $27) 27 (1 hr. at $27)54$27) hr. at (1 hr. at $177) 354 2 hr. at 354$177) 354 2 hr. at $177) overhead* Total product cost $ 231 $493 $534 The calculation of the predetermined overhead rate is as follows Manufacturing-overhead budget: Depreciation, machinery Maintenance, machinery Depreciation, taxes, and insurance $3,730,000 330,000 740,000 910,000 570,000 925,000 1,075,100 764,600 for factory Engineering Purchasing, receiving and shipping Inspection and repair of defects Material handling Miscellaneous manufacturing overhead costs Total $9,044,700 Direct-labor budget: Regular model: 23,500 hours Advanced Deluxe model: Total 3,400 hours 24,200 hours 51,100 hours model Budgeted overhead $9,044,700 Predetermined overhead rate Budgeted direct-labor 51100 hours $177 per hour hours 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 regular-model pump has come under increasing price pressure from offshore competitors. The result was that the price on the regular model has been lowered to $241. The company president recently asked the controller, "Why can't we compete with these other companies? They're selling pumps just like our regular model for $233 That's only two bucks more than our production cost. Are we really that inefficient? What gives?" The controller responded by saying, " 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 Regular Advanced Deluxe Model Model Model 12% Activity Cost Pool Cost Driver I: Depreciation, machinery 35% 53% Machine time Engineering hours Number of material Maintenance, machinery Il: Engineering 43% 6% 51% Inspection and repair of defects Il: Purchasing, receiving, and shipping 10% 47% orders Material handling Depreciation, taxes, and insurance for factory Miscellaneous manufacturing overhead Factory space usage 39% 22% 39% Required: 1. Compute the target prices for the three pump models, based on the traditional volume-based product-costing system. (Round your answers to 2 decimal places.) Regular Advanced Deluxe Model Model Model Target price 2. Compute new product costs for the three products, based on the new data collected by the controller. (Round your intermediate calculations and final answers to2 decimal places.) Regular Model Advanced Deluxe Model New product cost 3. Calculate a new target price for the three products, based on the activity-based costing system. (Round your intermediate calculations and final answers to 2 decimal places.) Regular Model Advanced Deluxe Model Model New target price