Question

Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models—one (A–25) principally used for fine eyewear and the other (A–10) for lenses used in binoculars, cameras, and similar equipment.

The following table shows the manufacturing cost of each unit is calculated, using activity-based costing, for these manufacturing cost pools.

Cost Pools		Allocation Base		Costing Rate
Materials handling		Number of parts		$	3.45	per part
Manufacturing supervision		Hours of machine time		$	24.30	per hour
Assembly		Number of parts		$	4.95	per part
Machine setup		Each setup		$	47.80	per setup
Inspection and testing		Logged hours		$	59.00	per hour
Packaging		Logged hours		$	31.00	per hour

BSI currently sells the A–10 model for $2,730 and the A–25 model for $1,695. Manufacturing costs and activity usage for the two products follow:

	A-10			A-25
Direct materials	$	137.76		$	74.44
Number of parts		129			100
Machine-hours		8.40			5.60
Inspection time		1.80			1.00
Packing time		1.10			0.56
Setups		18			9

1. Calculate the product cost and product margin for each product.

2. A new competitor has entered the market for lens-polishing equipment with a superior product at significantly lower prices, $2,010 for the A–10 model and $1,460 for the A–25 model. To try to compete, BSI has made some radical improvements in the design and manufacturing of its two products. The materials costs and activity usage rates have been decreased significantly, as follows:

	A-10			A-25
Direct materials	$	94.65		$	50.45
Number of parts		126			97
Machine-hours		9.0			3.6
Inspection time		1.8			0.90
Packing time		0.94			0.36
Setups		9			9

2-a. Calculate the total product costs with the new activity usage data.

2-b. Can BSI make a positive gross margin with the new costs, assuming that it must meet the price set by the new competitor?

4. What cost management method might be useful to BSI at this time?

Answer 1

Solution

Bowman Specialists Inc

1. Calculation of the product cost and product margin for each product:

Activity costs - A-10
activity	activity rate	activity usage	activity cost
materials handling	$3.45 per part	129 parts	$445.05
manufacturing supervision	$24.30 per MH	8.40 MH	$204.12
Assembly	$4.95 per part	129 parts	$638.55
Machine setup	$47.80 per setup	18 setups	$860.40
inspection and testing	$59 per logged hour	1.80 hours	$106.20
packaging	$31 per logged hour	1.10 hours	$34.10
Total			$2,288.42
Add: direct materials cost	$137.76
Total product cost		$2,426.18
Selling price		$2,730
product margin		$303.82

Activity costs - A-25
Activity	activity rate	activity usage	activity cost
materials handling	$3.45 per part	100 parts	$345
manufacturing supervision	$24.30 per MH	5.60 MH	$136.08
Assembly	$4.95 per part	100 parts	$495
Machine setup	$47.80 per setup	9 setups	$430.20
inspection and testing	$59 per logged hour	1.00 hours	$59
Packaging	$31 per logged hour	0.56 hours	$17.36
Total			$1,482.64
Add: direct materials cost	$74.44
Total product cost		$1,557.08
Selling price		$1,695
product margin		$137.92

2. Revised activity rates –

2a. calculation of the total product costs with the new activity usage data –

Activity costs - A-10
activity	activity rate	activity usage	activity cost
materials handling	$3.45 per part	126 parts	$434.70
manufacturing supervision	$24.30 per MH	9 MH	$218.70
Assembly	$4.95 per part	126 parts	$623.70
Machine setup	$47.80 per setup	9 setups	$430.20
inspection and testing	$59 per logged hour	1.80 hours	$106.20
packaging	$31 per logged hour	0.94 hours	$29.14
Total			$1,842.64
Add: direct materials cost	$94.65
Total product cost		$1,937.29
Selling price		$2,010
product margin		$72.71

Activity costs - A-25
activity	activity rate	activity usage	activity cost
materials handling	$3.45 per part	97 parts	$334.65
manufacturing supervision	$24.30 per MH	3.60 MH	$87.48
Assembly	$4.95 per part	97 parts	$480.15
Machine setup	$47.80 per setup	9 setups	$430.20
inspection and testing	$59 per logged hour	0.90 hours	$53.10
packaging	$31 per logged hour	0.36 hours	$11.16
Total			$1,396.74
Add: direct materials cost	$50.45
Total product cost		$1,447.19
Selling price		$1,460
product margin		$12.81

2b. Yes, BSI could make a positive gross margin with the new costs, while meeting the price set by the new competitor. However, the gross margin is less compared to the orignial prices.

Q4. What cost management to use –

BSI might use the Target costing method to be able to meet the new price set by the competitor. The method allows the company to seek ways to cut costs without compromising quality or functionality.