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Gigabyte Incorporated manufactures three products for the computer industry:

Gismos (product G): annual sales, 8,000 units

Thingamajigs (product T): annual sales, 15,000 units

Whatchamacallits (product W): annual sales, 4,000 units

The company uses a traditional, volume-based product-costing system with manufacturing overhead applied on the basis of direct-labor dollars. The product costs have been computed as follows:

Items	Product G	Product T	Product W
Raw material	$ 35.00		$ 52.50		$ 17.50
Direct labor	16.00	(0.8 hour)	12.00	(0.6 hour)	8.00	(0.4 hour)
Manufacturing overhead*Footnote asterisk	140.00		105.00		70.00
Total product cost	$ 191.00		$ 169.50		$ 95.50

*Footnote asteriskCalculation of predetermined overhead rate:

Manufacturing overhead budget:
Machine setup	$ 5,250
Machinery	1,225,000
Inspection	525,000
Material handling	875,000
Engineering	344,750
Total	$ 2,975,000

Direct-labor budget (based on budgeted annual sales):

Product G:	8,000 $16.00 =	$ 128,000
Product T:	15,000 $12.00 =	180,000
Product W:	4,000 $8.00 =	32,000
Total		$ 340,000

Predetermined overhead rate = Budgeted overhead Budgeted direct labor = 875%

Gigabytes pricing method has been to set a target price equal to 150 percent of full product cost. However, only the thingamajigs have been selling at their target price. The target and actual current prices for all three products are the following:

Items	Product G	Product T	Product W
Product cost	$ 191.00	$ 169.50	$ 95.50
Target price	286.50	254.25	143.25
Actual current selling price	213.00	254.25	200.00

PR 5-60 (Static) Part 1 Traditional versus Activity-Based Costing Systems (LO 5-1, 5-2, 5-3, 5-4, 5-5)

Gigabyte has been forced to lower the price of Gismos in order to get orders. In contrast, Gigabyte has raised the price of Whatchamacallits several times, but there has been no apparent loss of sales. Gigabyte Incorporated has been under increasing pressure to reduce the price even further on Gismos. In contrast, Gigabytes competitors do not seem to be interested in the market for Whatchamacallits. Gigabyte apparently has this market to itself.

Required:

1. Is product G the companys least profitable product?

2. Is product W a profitable product for Gigabyte Incorporated?

4. Gigabytes controller, Nan OSecond, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Gigabytes management to understand its product costs better. She got top managements approval to design an activity-based costing system, and an ABC project team was formed. In stage one of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then a cost driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of Gigabytes product lines. These data are summarized as follows:

Activity Cost Pool	Cost Driver	Product G	Product T	Product W
Machine setup	Number of setups	20%	30%	50%
Machinery	Machine hours	25%	50%	25%
Inspection	Number of inspections	15%	45%	40%
Material handling	Raw-material costs	25%	69%	6%
Engineering	Number of change orders	35%	10%	55%

Show how the controller determined the percentages given above for raw-material costs.

Note: Round Percentage of Total Raw-Material Cost to the nearest whole percentage (i.e .05 = 5)

Product	Raw-Material Cost per Unit	Annual Volume	Annual Raw-Material Cost	Percentage of Total Raw-Material Cost
G
T
W
Total

5. Develop product costs for the three products on the basis of an activity-based costing system.

	Product G	Product T	Product W
Direct material
Direct labor
Machine setup
Machinery
Inspection
Material handling
Engineering
Total	$0.00	$0.00	$0.00

6. Based on your answers in requirement 5, calculate a target price for each product, using Gigabytes pricing formula.