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		$	3.70	per part
Manufacturing supervision		Hours of machine time		$	24.20	per hour
Assembly		Number of parts		$	6.00	per part
Machine setup		Each setup		$	48.00	per setup
Inspection and testing		Logged hours		$	56.00	per hour
Packaging		Logged hours		$	26.00	per hour

BSI currently sells the A–10 model for $4,030 and the A–25 model for $2,010. Manufacturing costs and activity usage for the two products follow:

	A-10			A-25
Direct materials	$	147.76		$	73.44
Number of parts		130			101
Machine-hours		8.70			5.80
Inspection time		1.90			1.05
Packing time		1.15			0.58
Setups		28			14

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, $2,410 for the A–10 model and $1,885 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	$	96.65		$	51.45
Number of parts		128			99
Machine-hours		9.5			3.8
Inspection time		1.9			0.95
Packing time		0.97			0.38
Setups		14			14

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

Answer 1

Part 1
Cost Pools	Allocation Base	Costing Rate
Materials handling	Number of parts	3.70 per part
Manufacturing supervision	Hours of machine time	24.20 per hr
Assembly	Number of parts	6 per part
Machine setup	Each setup	48 per setup
Inspection and testing	Logged hours	56 per hr
Packaging	Logged hours	26 per hr
A-10
Direct materials	148
Number of parts	130
Machine-hours	9
Inspection time	2
Packing time	1
Setups	28
	Basis	Cost per	Total
Direct Material cost			148
Materials handling	130	4	481
Manufacturing supervision	9	24	211
Assembly	130	6	780
Machine setup	28	48	1,344
Inspection and testing	2	56	106
Packaging	1	26	30
Total Product Cost (B)			3,100
Sale Price (A)			4,030
Product Margin (A-B)			930
in %			23
A-25
Direct materials	73
Number of parts	101
Machine-hours	6
Inspection time	1
Packing time	1
Setups	14
	Basis	Cost per	Total
Direct Material cost			73
Materials handling	101	4	374
Manufacturing supervision	6	24	140
Assembly	101	6	606
Machine setup	14	48	672
Inspection and testing	1	56	59
Packaging	1	26	15
Total Product Cost (B)			1,939
Sale Price (A)			2,010
Product Margin (A-B)			71
in %			4
Part 2
A-10
Direct materials	97
Number of parts	128
Machine-hours	10
Inspection time	2
Packing time	1
Setups	14
	Basis	Cost per	Total
Direct Material cost			97
Materials handling	128	4	474
Manufacturing supervision	10	24	230
Assembly	128	6	768
Machine setup	14	48	672
Inspection and testing	2	56	106
Packaging	1	26	25
Total Product Cost (B)			2,372
New Sale Price (A)			2,410
Product Margin (A-B)			38
in %			2
A-25
Direct materials	51
Number of parts	99
Machine-hours	4
Inspection time	1
Packing time	0
Setups	14
	Basis	Cost per	Total
Direct Material cost			73
Materials handling	99	4	366
Manufacturing supervision	4	24	92
Assembly	99	6	594
Machine setup	14	48	672
Inspection and testing	1	56	53
Packaging	0	26	10
Total Product Cost (B)			1,861
New Sale Price (A)			1,885
Product Margin (A-B)			24
in %			1