Mohawk coffee (MC) 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. MC 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 predominantly automated roasting and packing 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 volume. MC prices its coffee at full product cost, including allocated overhead, plus a markup of 30%. The company competes primarily on quality, but customers are somewhat price-conscious as well.

Data for the 2021 budget include manufacturing overhead of $4,500,000, which has traditionally been allocated to products based on budgeted direct labor cost. The budget for direct labor cost for 2021 is $1,000,000. Budgeted direct raw material (mostly coffee beans) costs total $6,000,000.

The expected material and labor costs for one pound for two of the company's products are as follows:

	Kenyan	Sumatra
Direct material	$3.20	$4.20
Direct labor	$0.50	$0.50

MC's controller believes that the direct-labor based product costing system is providing misleading cost information. She has developed an analysis of 2021's manufacturing costs as below:

Activity	Cost driver	Budgeted Activity	Budgeted cost
Purchasing	Purchase orders	1,737	$868,500
Material handling	Setups	2,700	1,080,000
Quality control	Batches	1080	216,000
Roasting	Roasting hours	144,150	1,441,500
Blending	Blending hours	50,400	504,000
Packaging	Packaging hours	39,000	390,000
	Total manufacturing overhead cost		$4,500,000

Data regarding the 2021 production of Kenyan and Sumatra Coffees are shown below:

	Kenyan	Sumatra
Budgeted Sales (pounds)	2000	100,000
Number of batches	4	10
Setups	12	30
Purchase orders	4	4
Roasting time (hours)	20	1000
Blending time (hours)	10	500
Packaging time (hours)	2	100

Calculate:

Using the company's current direct-labor based product-costing system:

1. Determine the company's predetermined overhead rate using direct-labor cost as the cost driver.
2. Determine the full product costs and selling prices of one pound of Kenyan and one pound of Sumatra
3. Using an activity-based costing approach based on information provided, determine the full product costs and selling prices of one pound of Kenyan and one pound of Sumatra Coffee.
4. Based on your answers to parts (a) and (b) above in the context of MC, what are the implications of using the activity-based costing system relative to the existing product-cost system as the basis for pricing? In your opinion, under what conditions would activity-based costing systems provide useful and appropriate cost bases for long-term product planning and capacity planning decisions?