JSI prices its coffees at manufacturing cost plus a markup of 25%; however, because consumers of coffee beans are quite price-sensitive, JSI occasionally makes some adjustments to its cost- plus pricing scheme to keep the companys prices competitive. For the coming year, JSIs budget includes estimated manufacturing overhead cost of $2,200,000. JSI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $600,000, which represents 50,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company expects to purchase and use $5,000,000 of raw materials (mostly coffee beans) during the year. The expected costs for direct materials and direct labor for one-pound bags of two of the companys coffee products appear below:

Kenya Dark direct material-$4.5, direct labor $0.24

Viet Select direct material-$2.9, direct labor $0.24

Kenya Dark competes directly with several dark blends of other producers. JSIs marketing manager, Charles Bialetti, has noticed that competitors have been continuously lowering prices of their respective dark roasts. The average prices of other dark roasts are hovering around $6.40, almost 10 percent less than current prices. Charles is worried about the viability of Kenya Dark, whose profitability is already in question. Since the JSI plant is already operating at 95% of capacity, Charles is considering the proposal to eliminate the product in favor of other blends, such as Viet Select, a product recently introduced by JSI that has few direct competitors.

1. JSI incurs a substantial amount of manufacturing overhead. Why is this? Be specific. Think about what you have learned about manufacturing overhead in this course.
2. Using JSIs traditional costing system, calculate the per unit product cost and gross margin for one pound of the Kenya Dark and one pound of the Viet Select coffees. This would be similar to when we applied the manufacturing overhead based on a traditional cost driver (i.e. direct labor hours).

Activity Cost Pool Activity Measure for the Year for the Year

Purchasing..................................... Purchase orders 2,000 orders $ 560,000

Material handling .......................... Number of setups 1,000 setups 193,000

Quality control .............................. Number of batches 500 batches 90,000

Roasting ........................................ Roasting hours 95,000 roasting hours 1,045,000

Blending........................................ Blending hours 32,000 blending hours 192,000

Packaging...................................... Packaging hours 24,000 packaging hours 120,000 Total manufacturing overhead ...... $ 2,200,000

Data regarding the expected production of the specific coffee blends of Kenya Dark and Viet Select are presented below.

Expected sales ........................................	80,000 pounds	4,000 pounds
Batch size ...............................................	5,000 pounds	500 pounds
Setups .....................................................	2 per batch	2 per batch
Purchase order size .................................	20,000 pounds	500 pounds
Roasting time per 100 pounds ................	1.5 roasting hours	1.5 roasting hours
Blending time per 100 pounds................	0.5 blending hours	0.5 blending hours
Packaging time per 100 pounds..............	0.3 packaging hours	0.3 packaging hours

1. Determine the per unit product cost and gross margin for one pound of Kenya Dark coffee and one pound of Viet Select coffee under the proposed activity-based costing system.
2. Describe the two blends of coffee with which we are working in this case. Be as specific as possible. How many units of each blend do we produce and sell? In what batch volume is each blend produced? How many batches of each blend are produced?
3. Given your answers in (3) through (5), prepare a memo addressed to Charles Bialetti. In the memo, provide recommendations to help improve the profitability at JSI. Be as concrete as possible and note both the benefits and costs of the alternatives you propose.
4. Discuss briefly how the use of activity-based costing affects the current and future operating income.
5. The plant managers at JSI have requested the use of transaction drivers (number of times a process is completed) instead of the duration drivers for some activities mentioned above. Would you agree with this proposal? Explain briefly.