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 Raw material Product G Product T Product W $ 35.00 $ 52.50 $ 17.50 16.00 (0.8 hour) 140.00 12.00 (0.6 hour) 105.00 8.00 (0.4 hour) 70.00 $ 169.50 $ 95.50 Direct labor Manufacturing overhead* Total product cost $ 191.00 *Calculation of predetermined overhead rate: Manufacturing overhead budget: Machine setup Machinery Inspection Material handling Engineering Total $ 5,250 1,225,000 525,000 875,000 344,750 $ 2,975,000 Direct-labor budget (based on budgeted annual sales): Product G: Product T: Product W: Total $ 128,000 180,000 32,000 8,000 x $16.00 = 15,000 $12.00 = 4,000 x $8.00 = $ 340,000 Predetermined overhead rate = Budgeted overhead Budgeted direct labor = 875% Gigabyte's 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 cost Target price Actual current selling price Product G $ 191.00 286.50 213.00 Product T $ 169.50 254.25 254.25 Product W $ 95.50 143.25 200.00 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 Incorporated has been under increasing pressure to reduce the price even further on Gismos. In contrast, Gigabyte's 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 company's least profitable product? 2. Is product W a profitable product for Gigabyte Incorporated? 4. Gigabyte's controller, Nan O'Second, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Gigabyte's management to understand its product costs better. She got top management's 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 Gigabyte's product lines. These data are summarized as follows: Cost Driver Number of setups Machine hours Number of inspections Activity Cost Pool Product G Product T Product W Machine setup 20% 30% 50% Machinery 25% 50% 25% Inspection 15% 45% 40% Material handling 25% 69% 6% Engineering Number of change orders 35% 10% 55% Show how the controller determined the percentages given above for raw-material costs. Raw-material costs 5. Develop product costs for the three products on the basis of an activity-based costing system. 6. Based on your answers in requirement 5, calculate a target price for each product, using Gigabyte's pricing formula. Required 1 Required 2 Required 4 Required 5 Required 6 Show how the controller determined the percentages given in requirement 4 for raw-material costs. Note: Round Percentage of Total Raw-Material Cost to the nearest whole percentage (i.e .05 = 5) Percentage of Product Raw-Material Cost per Unit Annual Volume Annual Raw- Material Cost Total Raw- Material Cost G T W Total < Required 2 Required 5 > Required 1 Required 2 Required 4 Required 5 Required 6 Develop product costs for the three products on the basis of an activity-based costing system. Note: Round intermediate and final answers to 2 decimal places. Direct material Direct labor Machine setup Machinery Inspection Material handling Engineering Total Product G Product T Product W $ 0.00 $ 0.00 $ 0.00 < Required 4 Required 6 > Required 1 Required 2 Required 4 Required 5 Required 6 Based on your answers in requirement 5, calculate a target price for each product, using Gigabyte's pricing formula. Note: Round your intermediate calculations and final answers to 2 decimal places. Product G Product T Product W Target price based on new product costs < Required 5 Required 6 >