XYZ Company has designed a new and improved widget. Pricing will be determined on a cost-plus basis, and the company standard will be to charge cost plus 35%. XYZ has organized its systems into four departments: Stores, which involves the management of all the raw materials inventories; Production, which manufactures the product; Packaging, which prepares the product for shipment; and Warehousing, in which the final product is stored until an order is received. Estimates of the costs from each department for the new product are as follows:

Stores (raw materials):

Materials $85.00

Direct labour 0.5 hours at $14.50 per hour

Machine hours 0.02 hours Variable overhead materials cost 21%

Production:

Materials $5.70

Direct labour 0.25 hours at $16.00 per hour

Machine hours 0.22 hours

Variable overhead machine hours $4.70

Packaging:

Materials $0.25

Direct labour 0.1 hours at $15.50 per hour

Machine hours 0.1 hours

Variable overhead labour hours $1.20 per hour

Warehousing:

Materials $0

Direct labour 0.24 hours at $16.00 per hour

Machine hours 0.05 hours

Variable overhead labour hours $0.80 per hour

The fixed cost structure for each department is as follows:

Department Cost driver Fixed manufacturing Practical capacity Average activity Planned activity

overhead level level

Stores Materials costs $575,420 $3,400,000 $3,000,000 $3,200,000 Production Machine hours $366,080 88,000 79,200 83,600 Packaging Labour hours $203,840 14,000 12,600 13,020 Warehousing Labour hours $488,240 33,600 30,240 31,580

XYZ currently calculates manufacturing costs as all variable costs plus an allocation of total plant fixed manufacturing overhead based on an hourly rate for direct labour hours. The current total labour hours worked in the plant are 135,000.

Required:

a) Calculate the product price based on the current policy.

b) Calculate the product price using a fixed manufacturing overhead rate by department calculated using the average department activity.

c) Calculate the product price if the fixed manufacturing overhead rate is calculated by department based on planned activity level.