Question

Saved Lens Care Inc. (LCI) manufactures specialized equipment for polishing optical lenses. There are two models- one mainly used for fine eyewear (F-32) and another fom equipment (B-13). The manufacturing cost of each unit is calculated using activity-based costing, using the following manufacturing cost pools Cost Pools Materials handling Allocation Base Costing Rate $ 4.20 per part Manufacturing supervision Assembly Machine setup Inspection and testing Packaging Number of parts Hours of machine tine Number of parts Each setup $14.98 per hour $ 4.20 per part $57.40 per setup $ 46.40 per hour $ 20.40 per hour Logged hours Logged hours LCI currently sells the B-13 model for $5,825 and the F-32 model for $6.260 Manufacturing costs and activity usage for the two products are as follows B-13 F-32 Direct materials Number of parts $165.40 178 $ 76.32 138 Machine hours 8.80 4.38 Inspection tine Packaging time Setups 3.50 2.60 1.80 1.40 4 3 If the market price for B-13 and F-32 are reduced to $5,745 and $6,135 respectively, and Lens Care wants to maintain market share and profitability, what is the target cost for dollar)? B-13 F-32 $ 844.00 B) $2,142.o0 C) A) 762.00 767.00 $1,082.00 D) $2,142-00 $1,082.00 $1,498.00 $1,498.00 $1,064.00 E)

Answer 1

We would first calculate the profitability for both product under existing sale price
Using activity based costing we would calculate the overhead costs for each product
Calculation of overhead costs
	B-13	F-32
Materials handling (4.20*178; 4.20*138)	$747.60	$579.60
Manufacturing supervision (14.98*8.80; 14.98*4.38)	$131.82	$65.61
Assembly (4.20*178; 4.20*138)	$747.60	$579.60
Machine setup (57.40*4; 57.40*3)	$229.60	$172.20
Inspection and testing (46.40*3.50; 46.40*2.60)	$162.40	$120.64
Packaging (20.40*1.80; 20.40*1.40)	$36.72	$28.56
Total overhead costs	$2,055.74	$1,546.21
Calculation of total costs
Direct materials	$165	$76
Overhead costs	$2,056	$1,546
Total costs	$2,222	$1,623
Calculation of profit margin is shown below
Sale price	$5,825	$6,260
Total costs	$2,222	$1,623
Profit margin	$3,603	$4,637
Calculation of target costs for new market price
	B-13	F-32
Sales price	5745	6135
Less: Profit margin	$3,603	$4,637
Target costs	$2,142	$1,498
Thus, target cost in dollars for B-13 would be $2,142 and for F-32 would be $1,498 (Option D)