The company buys coffee beans from around the world and roasts, blends, and pack
ID: 2380696 • Letter: T
Question
The company buys coffee beans from around the world and roasts, blends, and packages them for resale.
WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major
cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly
automated roasting and packing process. The company uses relatively little direct labor.
Some of the coffees are very popular and sell in large volumes, while a few of the newer blends
have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus
a markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustments
are made. The company competes primarily on the quality of its products, but customers are priceconscious
as well.
Data for the 20x1 budget include manufacturing overhead of $3,000,000, which has been allocated
on the basis of each product
Explanation / Answer
direct labor dollar.
1(b)Jamaican 2.90 0.40 4.00 7.30 2.19 9.49
Colombian 3.90 0.40 4.00 8.30 2.49 10.79
Direct Material Direct Labor Overhead (.4 x $10).
Full Product Cost Markup (30%) Selling Price.
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3(a)The ABC analysis indicates that several activities other than direct labor drive overhead. The cost computations show that the current system significantly under costed Jamaican coffee, the low-volume product, and significantly overcosted the high-volume product, Colombian coffee.
3(b)The implication of the ABC analysis is that the low-volume products are using resources but are not covering their share of the cost of those resources. The Jamaican blend is currently priced at $9.49 which is significantly below its activity-based cost of $11.06. The company should set long-run prices above cost. If there is excess capacity and many of the costs are fixed, it may be acceptable to price some products below full activity-based cost temporarily in order to build demand for the product. Otherwise, the high-volume, high-margin products are subsidizing the low-volume, low-margin products.