5.69 Madison Electric Pump Corporation manufactures electric pumps for commercial use The company produces three models, designated as regula.. advanced, and deluxe The company uses a job-order cost accounting system with manufacturing overhead applied on the basis of direct-labor hours The system has been in place with little change for 25 years Product costs and annual sales data are as follows

For the past 10 years, the company's pricing formula has been to set each product's target price at 110 percent of its full product cost Recently, however, the regulat-model pump has come under lucreas- ing price pressure from offshore competitors. The result was that the price on the regular model has been lowered to $220 The company president recently asked the controller, "Why can't we compete with these other companies? They re selling pumps just like our regular model for 1212 That's only two bucks more then our producuon cost Are we really that inefficient? What gives The controller responded by saying, 'I think this is due to an outmoded product-costing system. As you may icmember, I raised a red flag about our system when I came on board last year. But the decision was to keep our current system in place In my judgment, our product-costing system is distorting our product costs Let me run a few numbers to demonstrate what I mean Getting the president's go-ahead, the controller compiled the basic data needed to implement an activity-based costing system These data are displayed in the following table The percentages are the proportion of cach cost diver consumed by each product line Product Lines Cost Regular Advanced Deluxe Activity Cost Pool Depreciation, machinery Mainienance, machinery Engineering Driver Model Model Model Machine time 39% 15% 18% Engineering hours .47% 0% 47% Inspection and spair of defects Purchasing, receiving, and shipping Number of matenal orders 47% 8% 45% Material handling Depreciation taxes, and insurance for factory Factory space usage 42% 15% 43% Miscellaneous manufacturing overhead Required: 1. Compute the target prices for the three pump models, based on the traditional, volume-based product-costing system 2. Compute new product costs for the three products, based on the new data collected by the control- ler Round to the nearest cent 3. Calculate a new target price for the thice products, based on the activity-based costing system Compare the new target price with the current actual selling price for the regular model pump 4. Write a memo to the company president explaining what has been happening as a result of the firm's traditional volume-based product-costing system 5. What strategic options does management have? What do you recommend, and why"

Annual sales (units; Product costs Regular Model 20.000 Advanced Model 1,000 Deluxe Model 10,000 Direct material $ 20 $ 50 $ 84 Direct labor 20 (1 hr at $20) 40:2 hi at $20) 40 (2 hr &t $20) Manufacturing overhead 170 (1 hr at $170) 340 h at $170) 340 (2 hi ai $170) Total product cosi $210 $430 $464 *The calculation of the predetermined overhead rate is as follows Manufacturing-overhead burget Depreciation machinery Maintenance mechinery $2,960,000 240 000 Depreciation, taxes, and insurance for factory Engineering Purchasing, receiving and shipping Inspection and repair of defects Material handling Miscelleneous manufacturing overhead costs Total Direct-labor budget 600 000 700 000 500,000 750,000 800 000 590,000 $7,140,000 Regular model 20,000 hours Advanced mode! 2,000 hours Deli xe model 20.000 has Total 42,000 hours Predetermined overhead rate Budgeted overhead Budgeted direct labor hours $ 140 000 42,000 hours = $170 per hour