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CoursHeroTranscribedText: Coffee Bean, Inc. (CBI) processes and distributes a variety of coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently the firm offers 15 coffees to gourmet shops in one-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred in the predominantly automated roasting and packaging process. 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 its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If its prices for certain coffees are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well. Data for the current budget include factory overhead of $3,000,000, which has been allocated by its current costing system on the basis of each product's direct labor cost. The budgeted direct labor cost for the current year totals $600,000. The firm budgeted $6,000,000 for purchases and use of direct materials (mostly coffee beans). The budgeted direct costs for one-pound bags of two of the company's many products are as follows: Data Direct Materials Direct Labor Normal mark-up percentage = Mona Loa $4.20 $0.30 Malaysian $3.20 $0.30 30% over full cost CBI's controller believe the current product costing system could be providing misleading cost information. She developed the followed budgeted overhead cost information for the current year: Activity Purchasing Materials handling Quality control Roasting Blending Packaging TOTAL factory overhead cost Cost Driver Purchase orders Setups Batches Roasting-hours Blending-hours Packaginghours Budgeted Driver Consumption Budgeted Cost 1,158 1,800 720 96,100 33,600 $579,000 $720,000 $144,000 $961,000 $336,000 26,000 $260,000 $3,000,000 Direct Labor Budget Direct materials budget $600,000 $6,000,000 Data regarding the current year's production of just two of the company's products, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees. Budgeted Sales (pounds) Batch size (pounds) Setups (batch) Purchase order size (pounds) Roasting time (hours per 100 lbs.) Blending time (hours per 100 lbs.) Mona Loa 100,000 10,000 3 25,000 1.00 0.50 Malaysian 2,000 500 3 500 1.00 0.50 Packaging time (hours per 100 lbs.) 0.10 0.10 Required 1. Using Coffee Bean, Inc.'s current product costing system: a. Determine the company's predetermined overhead rate using DL cost as the single cost driver. b. Determine the full product costs and selling prices of one pound of Mona Loa coffee and one pound of Malaysian coffee. 2. Using an ABC approach, develop a new product cost for one pound of Mona Loa coffee and one pound of Malaysian coffee. Allocate all overhead costs to the 100,000 pounds of Mona Loa and the 2,000 pounds of Malaysian. Compare the results with those in requirement 1. 3. What are the implications of the ABC system with respect to CBI's pricing and product-mix strategies? How does ABC add to CBI's competitive advantage

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