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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?
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 | ||||||||
Particulars | A-10 | A-25 |
Related SolutionsBowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models—one (A–25)...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
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Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models—one (A–25)...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
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3.45
per part
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Hours of machine time
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Assembly...
Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models—one (A–25)...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.
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Costing Rate
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Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models—one (A–25)...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 $ 3.30 per part Manufacturing supervision Hours of machine
time $ 23.40 per hour Assembly...
Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models—one (A–25)...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.
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Manufacturing supervision
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Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models—one (A–25)...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...
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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.
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