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 $ 2.85 per part Manufacturing supervision Hours of machine time $ 23.90 per hour Assembly Number of parts $ 3.75 per part Machine setup Each setup $ 46.20 per setup Inspection and testing Logged hours $ 47.00 per hour Packaging Logged hours $ 23.00 per hour BSI currently sells the A–10 model for $1,690 and the A–25 model for $1,200. Manufacturing costs and activity usage for the two products follow: A-10 A-25 Direct materials $ 135.76 $ 70.44 Number of parts 125 96 Machine-hours 7.20 4.80 Inspection time 1.40 0.80 Packing time 0.90 0.48 Setups 10 5

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, $1,390 for the A–10 model and $1,045 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 $ 86.65 $ 46.45 Number of parts 118 89 Machine-hours 7.0 2.8 Inspection time 1.4 0.70 Packing time 0.82 0.28 Setups 5 5

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

	Cost pools	allocation base		costing rate
	RM handling	no of parts		2.85	per part
	manufacturing supervision	hours of machine time		23.9	per hour
	assembly	no of parts		3.75	per part
	machine setup	each setup		46.2	per setup
	testing	logged hours		47	per hou
	packing	logged hours		23	per hou
		A-10	A-25
1	SP	1690	1200
	Materials	135.76	70.44
	no of parts	125	96
	machine hrs	7.2	4.8
	Inspection time	1.4	0.8
	packing time	0.9	0.48
	set up	10	5
		A-10		A-25
	Materials		135.76		70.44
	RM handling	125 X 2.85	356.25	96 X 2.85	273.6
	manufacturing supervision	7.2 X23.9	172.08	4.8 X 23.9	114.72
	assembly	125 X 3.75	468.75	96 X 3.75	360
	machine setup	10 X46.2	462	5 X 46.2	231
	testing	1.4 X 47	65.8	0.8 X 47	37.6
	packing	0.9 X 23	20.7	0.48 X 23	11.04
	Total product cost		1681.34		1098.4
	Sale price		1690		1200
	Product Margin		8.66		101.6
2		A-10	A-25
	Materials	86.65	46.45
	no of parts	118	89
	machine hrs	7	2.8
	Inspection time	1.4	0.7
	packing time	0.82	0.28
	set up	5	5
		A-10		A-25
	Materials		86.65		46.45
	RM handling	118 X 2.85	336.3	89 X 2.85	253.65
	manufacturing supervision	7 X23.9	167.3	2.8 X 23.9	66.92
	assembly	118 X 3.75	442.5	89 X 3.75	333.75
	machine setup	5 X46.2	231	5 X 46.2	231
	testing	1.4 X 47	65.8	0.7 X 47	32.9
	packing	0.82 X 23	18.86	0.28 X 23	6.44
2a	Total product cost		1348.41		971.11
	Sale price		1390		1045
2b	Product Margin		41.59		73.89
	Yes with the improved systems the company can still make positive margins by offering the price same as new competitor
3	Target costing method to be used in the given scenario