Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional overhead allocation system based on applying overhead at a rate of 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200% (i.e., double the total product cost). Sensing that this traditional system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system using three cost pools. Information on these cost pools for next year is as follows:
Budgeted level Budgeted
Activity cost pool Cost driver for cost driver overhead cost
Machine setups Number of setups 400 $150,000
Quality control Number of inspections 1,500 $180,000
Other overhead Machine hours 30,000 $480,000
Information (on a per unit basis) related to three popular products at Njombe are as follows:
Model #19 Model #36 Model #58
Direct material cost ............. $400 $540 $310
Direct labor cost ................. $810 $600 $220
Number of setups ............... 2 3 1
Number of inspections ........ 1 3 1
Number of machine hours ... 4 8 10
Selling prices under the new system are still going to continue to be set by multiplying total product cost by 200%.
25. (7 points) Determine the selling prices of each model above under the previous traditional overhead allocation system. Show your computations and clearly label your final answers in the box below.
26. (8 points) Determine the selling prices of each model above under the new activity-based costing system. Show your computations and clearly label your final answers in the box below.
27. (5 points) Refer back to questions 25 and 26. Did Njombe make a wise decision by changing to an activity-based costing system? Why or why not? Indicate your response in the box below.