Coffee Bean Inc. (CBI) processes and distributes a variety ofcoffee. CBI buys coffee beans from around the world and roasts,blends, and packages them for resale. Currently, the firm offers 15coffees to gourmet shops in 1-pound bags. The major cost is directmaterials; however, a substantial amount of factory overhead isincurred in the predominantly automated roasting and packingprocess. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes;a few of the newer brands have very low volumes. CBI prices itscoffee at full product cost, including allocated overhead, plus amarkup of 30%. If its prices for certain coffees are significantlyhigher than the market, CBI lowers its prices. The company competesprimarily on the quality of its products, but customers are priceconscious as well.

Data for the current budget include factory overhead of$2,300,000, which has been allocated on the basis of each product’sdirect labor cost. The budgeted direct labor cost for the currentyear totals $593,000. The firm budgeted $5,300,000 for purchase anduse of direct materials (mostly coffee beans).

The budgeted direct costs for 1-pound bags of two of thecompany’s many products are as follows:

	Mona Loa			Malaysian
Direct materials	$	4.20		$	3.20
Direct labor		0.30			0.30

CBI’s controller, Mona Clin, believes that its current productcosting system could be providing misleading cost information. Shehas developed this analysis of the current year’s budgeted factoryoverhead costs:

Activity	CostDriver	Budgeted Activity			Budgeted Cost
Purchasing	Purchase orders		1,088		$	572,000
Materials handling	Setups		1,730			713,000
Quality control	Batches		650			137,000
Roasting	Roasting hours		95,400			954,000
Blending	Blending hours		32,900			329,000
Packaging	Packaging hours		25,300			253,000
Total factory overhead cost					$	2,958,000

Data regarding the current year’s production of just two of itslines, Mona Loa and Malaysian, follow. There is no beginning orending direct materials inventory for either of these coffees.

	Mona Loa	Malaysian
Budgeted sales	100,700 pounds	1,930 pounds
Batch size	9,300 pounds	430 pounds
Setups	3 per batch	3 per batch
Purchase order size	24,300 pounds	430 pounds
Roasting time	1 hour per 100 pounds	1 hour per 100 pounds
Blending time	0.5 hour per 100 pounds	0.5 hour per 100 pounds
Packaging time	0.1 hour per 100 pounds	0.1 hour per 100 pounds

Required:

1. Using Coffee Bean Inc.’s current product costing system,

a. Determine the company’s predetermined overhead rate usingdirect labor cost as the single cost driver.

b. Determine the full product costs and selling prices of onepound of Mona Loa coffee and one pound of Malaysian coffee.

2. Using an activity-based costing approach, develop a newproduct cost for 1 pound of Mona Loa coffee and 1 pound ofMalaysian coffee. Allocate all overhead costs to the 100,700 poundsof Mona Loa and the 1,930 pounds of Malaysian.