Sting: A Tool to Aid Decision Making CASE 78-5 Activity-Based Costing and Pricing (L07) Java Source, Inc. (JSI), is a processor and distributor of a variety of blends of coffee. The company huys coffee beans from around the world and roasts, blends, and packages them for resale. JSI of- EX fers a large variety of different coffees that it sells to gourinet shops in one-pound bags. The major cost of the coffee is raw materials. However, the company's predominantly automated roasting, blending, and packing processes require a substantial amount of manufacturing overhead. The company uses relatively little direct labor. Some of JSI's coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. JSI prices its coffees at manufacturing cost plus a markup of 25%, with some adjustments made to keep the company's prices competitive. For the coming year, JSI's 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 totais $600,000, which represents 50,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company will 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 company's coffee products appear below. Kenya Dark Viet Select Direct materials. Direct labor (0.02 hours per bag) $4.50 $0.24 $2.90 $0.24 JSI's controller believes that the company's traditional costing system may be providing mis- leading cost information. To determine whether or not this is correct, the controller has prepared an analysis of the year's expected manufacturing overhead costs, as shown in the following table: Activity Cost Pool Expected Activity for the Year Activity Measure Expected Cost for the Year Purchasing Material handling Quality control. Roasting Blending Packaging Total manufacturing overhead cost Purchase orders Number of setups Number of batches Roasting hours Blending hours Packaging hours 2,000 orders 1,000 setups 500 batches 95,000 roasting hours 32,000 blending hours 24,000 packaging hours $ 560,000 193,000 90,000 1,045,000 192,000 120,000 $2,200,000 Data regarding the expected production of the Kenya Dark coffee and the Viet Select coffee are presented below. Kenya Dark Viet Select Expected sales Batch size. Setups.. Purchase order size Roasting time per 100 pounds 100 pounds Packaging time per 100 pounds ....... 80,000 pounds 5,000 pounds 2 per batch 20,000 pounds 1.5 roasting hours 0.5 0.3 packaging hours 4,000 pounds 500 pounds 2 per batch 500 pounds 1.5 roasting hours 0.5 blending hours 0.3 packaging hours 1. Using direct labor-hours as the base for assigning manufacturing overhead cost 10 products, do Chapter 7 Required: the following: b. Determine the predetermined overhead rate that will be used during the year. Determine the unit product cost of one pound of the Kenya Dark coffee and one pound of the Viet Select coffee