Gigabyte, Inc., 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:

Product G

Product T

Product W

Raw material

$

105.00

$

157.50

$

52.50

Direct labor

48.00

(2.4 hr. at $20)

36.00

(1.8 hr. at $20)

24.00

(1.2 hr. at $20)

Manufacturing overhead*

420.00

($48 875%)

315.00

($36 875%)

210.00

($24 875%)

Total product cost

$

573.00

$

508.50

$

286.50

The calculation of the predetermined overhead rate is as follows:

Manufacturing overhead budget:

Machinery

$

3,675,000

Machine setup

15,750

Inspection

1,575,000

Material handling

2,625,000

Engineering

1,034,250

Total

$

8,925,000

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

Product G:	8,000			$	48.00		=	$	384,000
Product T:	15,000			$	36.00		=		540,000
Product W:	4,000			$	24.00		=		96,000
Total								$	1,020,000

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

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:

	Product G			Product T			Product W
Product cost	$	573.00		$	508.50		$	286.50
Target price		859.50			762.75			429.75
Actual current selling price		639.00			762.75			600.00

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, Inc., 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.

Solver for:

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: (Round Percentage of Total Raw-Material Cost to the nearest whole percentage.)

Activity Cost Pool	Cost Driver	Product G			Product T			Product W
Machinery	Machine hours		24	%		50	%		26	%
Machine setup	Number of setups		22	%		30	%		48	%
Inspection	Number of inspections		16	%		44	%		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.

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. (Round intermediate and final answers to 2 decimal places.)

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

6.	Based on your answers in the above requirement, calculate a target price for each product, using Gigabytes pricing formula. (Round your intermediate calculations and final answers to 2 decimal places.)

	Product G	Product T	Product W
Target price based on new product costs