Coffee Bean Incorporated (CBI) processes and distributes high-quality coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently, the firm offers 2 coffees to gourmet shops in 1-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred in the predominantly automated roasting and packing process. The company uses relatively little direct labor.

CBI prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. If its prices are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well.

Data for the current budget include factory overhead of $3,028,000, which has been allocated on the basis of each products direct labor cost. The budgeted direct labor cost for the current year totals $600,000. The firm budgeted $6,000,000 for purchase and use of direct materials (mostly coffee beans).

The budgeted direct costs for 1-pound bags are as follows:

Mona LoaMalaysianDirect materials$ 4.20$ 3.20Direct labor0.300.30

CBIs controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current years budgeted factory overhead costs:

ActivityCost DriverBudgeted Driver ConsumptionBudgeted CostPurchasingPurchase orders1,178$ 589,000Materials handlingSetups1,820728,000Quality controlBatches740148,000RoastingRoasting hours96,300963,000BlendingBlending hours33,800338,000PackagingPackaging hours26,200262,000Total factory overhead cost $ 3,028,000

Data regarding the current years production for the Mona Loa and Malaysian lines follow. There is no beginning or ending direct materials inventory for either of these coffees.

Mona LoaMalaysianBudgeted sales100,000 pounds2,000 poundsBatch size10,000 pounds500 poundsSetups3 per batch3 per batchPurchase order size25,000 pounds500 poundsRoasting time1 hour per 100 pounds1 hour per 100 poundsBlending time0.5 hour per 100 pounds0.5 hour per 100 poundsPackaging time0.1 hour per 100 pounds0.1 hour per 100 pounds

Coffee Bean has total practical capacity as noted in the table below, i.e. processing 1,440 purchase orders, 2,440 setups, etc. These are the levels of activity work that are sustainable.

ActivityPractical CapacityPurchasing1,440Materials handling2,440Quality control1,240Roasting100,400Blending36,400Packaging30,400

Required:

1. Determine the activity rates based on practical capacity and the cost of idle capacity for each activity.