Reference no: EM132510154
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 RateMaterials handling Number of parts $3.70per part
Manufacturing supervision Hours of machine time $24.20per hour
Assembly Number of parts $6.00per part
Machine setup Each setup $48.00per setup
Inspection and testing Logged hours $56.00per hour
Packaging Logged hours $26.00per 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:
Question 1. Calculate the product cost and product margin for each product.
Question 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.
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?
Question 3. What cost management method might be useful to BSI at this time?
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