I am having trouble answering 3a and 3b of Problem 5-56 on the attached document.

Problem 5-56 "World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominately automated roasting and packaging process. The company uses relatively little direct labor. Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If prices for certain coffees 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 20x1 budget include manufacturing overhead of $3,000,000, which has been allocated on the basis of each product's direct-labor cost. The budgeted direct-labor cost for 20x1 totals $600,000. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $6,000,000. The expected prime costs for one-pound bags of two of the company's products are as follows: Kona $3.20 0.30 Direct material Direct labor Malaysian $4.20 0.30 WGCC'S controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs shown in the following chart: Activity Purchasing Material handling Quality control Roasting Blending Packaging Total manufacturing-overhead cost Cost Driver Budgeted Activity Budgeted Cost Purchase orders 1,158 Setups 1,800 Batches 720 Roasting hours 96,100 Blending hours 33,600 Packaging hours 26,000 $579,000 $720,000 $144,000 $961,000 $336,000 $260,000 $3,000,000 Data regarding the 20x1 production of Kona and Malaysian coffee are shown in the following table. There will be no raw-material inventory for either of these coffees at the beginning of the year. Budgeted sales Batch size Setups Purchase order size Roasting time Blending time Packaging time Kona 2,000 lb. 500 lb. 3 per batch 500 lb. 1 hr. per 100 lb. .5 hr. per 100 lb. .1 hr. per 100 lb. Malaysian 100,000 lb. 10,000 lb. 3 per batch 25,000 lb. 1 hr. per 100 lb. .5 hr. per 100 lb. .1 hr. per 100 lb. Required: 1. Using WGCC's current product-costing system: a. Determine the company's predetermined overhead rate using direct-labor as the single cost driver. b. Determine the full product costs and selling prices of one pound of Kona coffees and one pound of Malaysian coffee. 2. Develop a new product cost, using an activity-based costing approach, for one pound of Kona coffee and one pound of Malaysian coffee. 3. What are the implications of the activity-based costing system with respect to a. The use of direct labor as a basis for applying overhead to products? b. The use of the existing product-costing system as the basis for pricing?" (Hilton, 2011, p. 218-219). 1. (a.) WORLD GOURMET COFFEE COMPANY Predetermined overhead rate using direct-labor as s ingle cost driver: Total manufacturing overhead cost Budgeted direct-labor cost Overhead per direct-labor dollar $3,000,000 $600,000 $5.00 Total manufacturing overhead /Budgeted direct labor cost 1. (b) Full product costs and selling prices per one-pound bag: Kona Malaysian Direct material Direct labor Overhead Full product cost $3.20 0.30 1.50 $5.00 $4.20 0.30 1.50 $6.00 Markup Selling price $1.50 $6.50 $1.80 $7.80 Direct Labor * Overhead per direct-labor dollar Full Product Cost * 30% Markup Full Product Cost + Markup 2. WORLD GOURMET COFFEE COMPANY Budgeted Manufacturing-Overhead Costs Activity Purchasing Material handling Quality control Roasting Blending Packaging Cost Driver Purchase orders Setups Batches Roasting hours Blending hours Packaging hours Budgeted Activity 1,158 1,800 720 96,100 33,600 26,000 Budgeted Cost Total manufacturing-overhead cost Total cost Budgeted Cost / Budgeted Activity Malaysian Coffee Standard cost per pound: Purchasing Material handling Quality control Roasting Blending Packaging $500 $400 $200 $10 $10 $10 $3,000,000 Kona Direct material Direct labor Unit Cost $579,000 $720,000 $144,000 $961,000 $336,000 $260,000 Budgeted sales (lb.) Batch size Standard cost per pound: $3.20 $0.30 $1.00 $2.40 $0.40 $0.10 $0.05 $0.01 $7.46 3(a). What are the implications of activity based costing system with respect to the use of direct labor as a basis for applying overhead to products? 3(b). What are the implications of activity based costing system with respect to the use of existing product-costing system as the basis for pricing? Direct material Direct labor Purchasing Material handling Quality control Roasting Blending Packaging Total cost $4.20 $0.30 $0.02 $0.12 $0.02 $0.10 $0.05 $0.01 $4.82 (Unit Cost for Activity * Number of Purchase Orders for Product) / Budgeted Sales (Unit Cost for Activity * Number of Set Ups for the product) / Budgeted Sales (Unit Cost for Activity * Number of Batches for the product) / Budgeted Sales (Unit Cost for Activity * Number of Roasting Hours for the product) / Budgeted Sales (Unit Cost for Activity * Number of Blending Hours for the product) / Budgeted Sales (Unit Cost for Activity * Number of Packaging Hours for the product) / Budgeted Sales Number of batches Set ups per batch Number of set ups Purchase order size (lb.) Number of purchase orders Roasting time per 100 lb. Roasting time Blending time per 100 lb. Blending time Packaging time for 100 lb. Packaging time Kona Malaysian 2000 100000 500 10000 4 10 Budgeted sales in lb. / Batch size 3 3 12 30 Number of batches * Set ups per batch 500 25000 4 4 Budgeted sales in lb. / Purchase order size in lb. 1 1 20 1000 (Roasting time per 100 lb. * Budgeted Sales in lb.) / 100 0.5 0.5 10 500 (Blending time per 100 lb. * Budgeted Sales in lb.) / 100 0.1 0.1 2 100 (Packaging time per 100 lb. * Budgeted Sales in lb.) / 100 Brian Carr Exercise III-3 "For each of the following independent cases, use the equation method to compute the economic order quantity" (Hilton, 2011, p. 784). Annual requirement (in units) Cost per order Annual holding cost per unit Case A Case B Case C 13,230 1,681 560 $250 $40 $10 6 20 7 Case A Economic Order Quantity = ((2)(Annual requirement)(Cost per order)) / (Annual holding cost per unit) EOQ = EOQ = ((2)(13,230)(250)) / (6) (6,615,000) / (6) (1,102,500) 1050 Units Case B Economic Order Quantity = ((2)(Annual requirement)(Cost per order)) / (Annual holding cost per unit) EOQ = EOQ = ((2)(1,681)(40)) / (20) (134,480) / (20) (6,724) 82 Units Case C Economic Order Quantity = ((2)(Annual requirement)(Cost per order)) / (Annual holding cost per unit) EOQ = EOQ = ((2)(560)(10)) / (7) (11,200) / (7) (1,600) 40 Units References: Hilton, R. W. (2011). Managerial accounting: Creating value in a dynamic business environment (9th ed.). New York, NY: McGraw-Hill/Irwin