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		$	3.40	per part
Manufacturing supervision		Hours of machine time		$	23.60	per hour
Assembly		Number of parts		$	5.55	per part
Machine setup		Each setup		$	47.40	per setup
Inspection and testing		Logged hours		$	47.00	per hour
Packaging		Logged hours		$	17.00	per hour

BSI currently sells the A–10 model for $4,810 and the A–25 model for $1,995. Manufacturing costs and activity usage for the two products follow:

	A-10			A-25
Direct materials	$	141.76		$	67.44
Number of parts		127			98
Machine-hours		7.80			5.20
Inspection time		1.60			0.90
Packing time		1.00			0.52
Setups		34			17

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, $2,395 for the A–10 model and $1,870 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	$	90.65		$	48.45
Number of parts		122			93
Machine-hours		8.0			3.2
Inspection time		1.6			0.80
Packing time		0.88			0.32
Setups		17			17

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

1)
Calculation of Total Product Cost
Particulars	A-10	A-25
	Working	Amount	Working	Amount
	Activity Consumption (A)	Cost driver rate (B)	(A*B)	Activity Consumption(C )	Cost driver rate (D)	(C*D)
Direct Material			$     141.76			$       67.44
Materila Handling	127	$                           3.40	$     431.80	98	$                    3.40	$     333.20
Manufactring Supervision	7.8	$                         23.60	$     184.08	5.2	$                 23.60	$     122.72
Assembly	127	$                           5.55	$     704.85	98	$                    5.55	$     543.90
Machine setup cost	34	$                         47.00	$ 1,598.00	17	$                 47.00	$     799.00
Inspection and testing	1.6	$                         47.00	$       75.20	0.9	$                 47.00	$       42.30
Packing time	1	$                         17.00	$       17.00	0.52	$                 17.00	$         8.84
Total Cost		$ 3,152.69		$ 1,917.40
Calculation of Product Margin
Particulars	A-10	A-25
(A) Sale	$                                            4,810.00	$                   1,995.00
(B) Total Cost	$                                            3,152.69	$                   1,917.40
(C)Profit	$                                            1,657.31	$                         77.60
(D) Product Margin [C*100/(A)]	34.46	3.89
2-a)
Calculation of Total Product Cost Using New Activity Usage Data
Particulars	A-10	A-25
	Working	Amount	Working	Amount
	Activity Consumption (A)	Cost driver rate (B)	(A*B)	Activity Consumption(C )	Cost driver rate (D)	(C*D)
Direct Material			$       90.65			$       48.45
Materila Handling	122	$                           3.40	$     414.80	93	$                    3.40	$     316.20
Manufactring Supervision	8	$                         23.60	$     188.80	3.2	$                 23.60	$       75.52
Assembly	122	$                           5.55	$     677.10	93	$                    5.55	$     516.15
Machine setup cost	17	$                         47.00	$     799.00	17	$                 47.00	$     799.00
Inspection and testing	1.6	$                         47.00	$       75.20	0.8	$                 47.00	$       37.60
Packing time	0.88	$                         17.00	$       14.96	0.32	$                 17.00	$         5.44
Total Cost		$ 2,260.51		$ 1,798.36
Calculation of Product Margin Using New Total Cost
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