Gigabyte, Inc., manufactures three products for the computer industry: Gismos (product G): annual sales, 8,000 units Thingamajigs (product T): annual sales, 15,000 units Whatchamacallits (product W): annual sales, 4,000 units The company uses a traditional, volume-based product-costing system with manufacturing overhead applied on the basis of direct-labor dollars. The product costs have been computed as follows:

Product G

Product T

Product W

  Raw material

$

105.00

$

157.50

$

52.50

  Direct labor

48.00

(2.4 hr. at $20)

36.00

(1.8 hr. at $20)

24.00

(1.2 hr. at $20)
  Manufacturing overhead*

420.00

($48 × 875%)

315.00

($36 × 875%)

210.00

($24 × 875%)
  Total product cost

$

573.00

$

508.50

$

286.50

The calculation of the predetermined overhead rate is as follows:

 

  Manufacturing overhead budget:
      Machinery

$

3,675,000

      Machine setup

15,750

      Inspection

1,575,000

      Material handling

2,625,000

      Engineering

1,034,250

      Total

$

8,925,000

Direct-labor budget (based on budgeted annual sales):

 
  Product G:

8,000

×

$

48.00

=

$

384,000

  Product T:

15,000

×

$

36.00

=

540,000

  Product W:

4,000

×

$

24.00

=

96,000

  Total

$

1,020,000

 

Predetermined overhead rate =

Budgeted overhead

= 875%

Budgeted direct labor

Gigabyte’s pricing method has been to set a target price equal to 150 percent of full product cost. However, only the thingamajigs have been selling at their target price. The target and actual current prices for all three products are the following:

Product G

Product T

Product W

  Product cost

$

573.00

$

508.50

$

286.50

  Target price

859.50

762.75

429.75

  Actual current selling price

639.00

762.75

600.00

Gigabyte has been forced to lower the price of gismos in order to get orders. In contrast, Gigabyte has raised the price of whatchamacallits several times, but there has been no apparent loss of sales. Gigabyte, Inc., has been under increasing pressure to reduce the price even further on gismos. In contrast, Gigabyte’s competitors do not seem to be interested in the market for whatchamacallits. Gigabyte apparently has this market to itself.

Solver for:

4. Gigabyte’s controller, Nan O’Second, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Gigabyte’s management to understand its product costs better. She got top management’s approval to design an activity-based costing system, and an ABC project team was formed. In stage one of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then a cost driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of Gigabyte’s product lines. These data are summarized as follows: (Round Percentage of Total Raw-Material Cost to the nearest whole percentage.)

  Activity Cost Pool   Cost Driver

Product G

Product T

Product W

  Machinery   Machine hours

24

%

50

%

26

%
  Machine setup   Number of setups

22

%

30

%

48

%
  Inspection   Number of inspections

16

%

44

%

40

%
  Material handling   Raw-material costs

25

%

69

%

6

%
  Engineering   Number of change orders

35

%

10

%

55

%

Show how the controller determined the percentages given above for raw-material costs.

 

Product

Raw-Material Cost per Unit

Annual Volume

Annual Raw-Material Cost

Percentage of Total Raw-Material Cost

G

T

W

Total

 

5. Develop product costs for the three products on the basis of an activity-based costing system. (Round intermediate and final answers to 2 decimal places.)

 

 

Product G

Product T

Product W

Direct material
Direct labor
Machinery
Machine setup
Inspection
Material handling
Engineering
Total

 

6. Based on your answers in the above requirement, calculate a target price for each product, using Gigabyte’s pricing formula. (Round your intermediate calculations and final answers to 2 decimal places.)

 

 

Product G

Product T

Product W

Target price based on new product costs

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