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Bowman Specialists Inc
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 Materials handling Manufacturing supervision Assembly Machine setup Inspection and testing Packaging Allocation Base Number of parts Hours of machine time Number of parts Each setup Logged hours Logged hours Costing Rate $ 2.85 per part $23.90 per hour $ 3.75 per part $46.20 per setup $47.00 per hour $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: Direct materials Number of parts Machine-hours Inspection time Packing time Setups A-10 $135.76 125 7.20 1.40 0.90 10 A-25 $ 70.44 96 4.80 0.80 0.48 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: Direct materials Number of parts Machine-hours Inspection time Packing time Setups A-10 $ 86.65 118 7.0 1.4 0.82 5 A-25 $ 46.45 89 2.8 0.70 0.28 5 2-a. Calculate the total product costs with the new activity usage data.
Machine-hours Inspection time Packing time Setups 7.20 1.40 0.90 10 4.80 0.80 0.48 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: Direct materials Number of parts Machine-hours Inspection time Packing time Setups A-10 $ 86.65 118 7.0 1.4 0.82 5 A-25 $ 46.45 89 2.8 0.70 @.28 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? Complete this question by entering your answers in the tabs below. Reg 1 Req 2A Reg 2B Req 4 Calculate the total product costs with the new activity usage data. (Round your answers to 2 decimal places.) A-10 A-25 Product cost
Expert Solution
1)
| A - 10 ($) | A- 25 ($) | |
| Direct material | 135.76 | 70.44 |
| Material Handling | 356.25 ($2.85 × 125) | 273.60 ($2.85 × 96) |
| Manufacturing supervision | 172.08 ($23.90 × 7.20) | 114.72 ($23.90 × 4.80) |
| Assembly | 468.75 ($3.75 × 125) | 360 ($3.75 × 96) |
| Machine set up | 462 ($46.20 × 10) | 231 ($46.20 × 5) |
| Inspection and testing | 65.80 ($47 × 1.40) | 37.60 ($47 × 0.80) |
| Packaging | 20.70 ($23 × 0.90) | 11.04 ($23 × 0.48) |
| Total product cost per unit (A) | $1,681.34 | $1,098.40 |
| Selling price per unit ($) (B) | $1,690 | $1,200 |
| Product margin per unit (B - A) = C | $8.66 | $101.60 |
2 a.)
| A - 10 ($) | A - 25 ($) | |
| Direct materials | 86.65 | 46.45 |
| Materials Handing | 336.30 ($2.85 × 118) | 253.65 ($2.85 × 89) |
| Manufacturing supervision | 167.30 ($23.90 × 7) | 66.92 ($23.90 × 2.8) |
| Assembly | 442.50 ($3.75 × 118) | 333.75 ($3.75 × 89) |
| Machine set up | 231($46.20 × 5) | 231 ($46.20 × 5) |
| Inspection and testing | 65.80 ($47 × 1.40) | $32.90 ($47 × 0.70) |
| Packaging | 18.86 ($23 × 0.82) | 6.44 (23 × 0.27) |
| Total | $1348.41 | $971.11 |
2b.)
| A - 10 ($) | A - 25 ($) | |
| Selling price per unit (A) | 1,390 | 1,045 |
| Cost per unit (B) | 1348.41 | 971.11 |
| Product margin per unit (A - B) = C | 41.59 | 73.89 |
Yes, BSI make positive gross margin with the new cost and price set by new competitor.
4.) Target costing will be suitable to BSI Because in this method we can well plan in advance what cost to be incurred and what margin is achieved to be for a product with competitive market.
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