Davids Tea is a distributor and processor of different tea blends. The company buys raw tea leaves from around the world and gently roasts, blends and packages them for resale. David:Tea currently has over 30 different blends of gourmet teas that it sells to retail shops in one-kilogram bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly automated roasting and packaging process. The company uses relatively little direct labout. Some of the tea blends are very popular and sell in large volumes, while a few newer blends have very low volumes. DavidsTea prices its tea at full product cost, including allocated overhead, plus a markup of 30 percent. If prices for certain teas are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price conscious as well. Data for the 2020 budget include manufacturing overhead of $3,000,000 which has been allocated based on each product's direct-labour costs. The budgeted direct-labour cost for 2020 totals $600,000 The expected prime costs for one-kilogram bags of two of the company's products are as follows: Direct Materials Direct Labour Green Seduction Blend $3.20 30 Yuzu Matcha Blend $4.20 30 David Tea's controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 2020 budgeted manufacturing- overhead costs shown in the following chart. Activity Cost Driver Budgeted Activity Budgeted Cost Purchasing Purchase orders 1.158 $579,000 Material handling Setups 1.800 720,000 Quality control Batches 720 144,000 Roasting Roasting hours 96,100 961,100 Blending Blending hours 33,600 336.000 Packaging Packaging hours 26,000 260.000 Total manufacturing-overhead cost $3.000.000 Data regarding the 2020 production of the Green Seduction Blend and the Yuzu Matcha Blend are shown in the following table. There will be no raw material inventory of these teas at the beginning of the year. Green Seduction Blend 2,000 kg 500 kg 3 per batch 500 kg 1 hour per 100 kg 0.5 hours per 100 kg 0.1 hours per 100 kg Budgeted Sales Batch size Setups Purchase order size Roasting time Blending time Packaging time Yuzu Matcha Blend 100,000 kg 10,000 kg 3 25,000 kg 1 hour per 100 kg 5 hour per 100 kg 1 hour per 100 kg per batch Required: 1. Using DavidsTea's current costing system: a. Determine the company's predetermined overhead rate using direct-labour cost as the single cost driver. b. Determine the full product costs and selling prices of one kilogram of Green Seduction Blend and one kilogram of Yuzu Matcha blend. 2. Develop a new product cost, using an Activity Based Costing (ABC) approach, for one kilogram of the two different blends of tea. 3. What are the implications of the ABC system with respect to a. The use of direct labour as a basis for applying overhead to products? b. The use of the existing product-costing system as the basis for pricing