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		$	3.80	per part
Manufacturing supervision		Hours of machine time		$	24.40	per hour
Assembly		Number of parts		$	6.15	per part
Machine setup		Each setup		$	48.20	per setup
Inspection and testing		Logged hours		$	59.00	per hour
Packaging		Logged hours		$	29.00	per hour

BSI currently sells the A–10 model for $3,770 and the A–25 model for $2,015. Manufacturing costs and activity usage for the two products follow:

	A-10			A-25
Direct materials	$	149.76		$	75.44
Number of parts		131			102
Machine-hours		9.00			6.00
Inspection time		2.00			1.10
Packing time		1.20			0.60
Setups		26			13

Required:

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, $2,415 for the A–10 model and $1,890 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	$	98.65		$	52.45
Number of parts		130			101
Machine-hours		10			4.00
Inspection time		2			1
Packing time		1			.40
Setups		13			13

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