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?

________________________________________________________________________________

1.

Calculate the product cost and product margin for each product. (Round your answers to 2 decimal places.)

	A–10 A–25 Product cost Product margin 2A) Calculate the total product costs with the new activity usage data. (Round your answers to 2 decimal places.) A-10 A-25

Answer 1

1	Particulars	Per UNIT	A-10	A-25
	Direct Material		141.76	67.44
	Material Handling	3.4	431.80	333.20
	Manufacturing	23.6	184.08	122.72
	Supervision
	Assembly	5.55	704.85	543.90
	Machine setup	47.4	1611.60	805.80
	Inspection & Testing	47	75.20	42.30
	Packing	17	17.00	8.84
	Total Cost		3166.29	1924.20
	Selling Price		4810	1995
	margin		1643.71	70.80
2	Particulars	Per UNIT	A-10	A-25
	Direct Material		90.65	48.45
	Material Handling	3.4	414.80	316.20
	Manufacturing	23.6	188.80	75.52
	Supervision
	Assembly	5.55	677.10	516.15
	Machine setup	47.4	805.80	805.80
	Inspection & Testing	47	75.20	37.60
	Packing	17	14.96	5.44
	Total Cost		2267.31	1805.16
	Selling Price		2395	1870
	margin		127.69	64.84
	1.		A-10	A-25
	Product cost		3166.29	1924.20
	Product margin		1643.71	70.80
	2.		A-10	A-25
	Product cost		2267.31	1805.16
	Product margin		127.69	64.84

4. by process costing BSI can come to the conclusion that Machine set up cost for product is so high and by cost reduction or cost control strategy BSI can Reduce the cost and other cost as much as possible and bsi can use unit costing to identify cost of a unit step by step and reduce as much as possible