Question

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 $ 3.00 per part $22.80 per hour $ 4.95 per part $46.60 per setup $35.00 per hour $25.00 per hour BSI currently sells the A-10 model for $5,850 and the A-25 model for $1,975. Manufacturing costs and activity usage for the two products follow: Direct materials Number of parts Machine-hours Inspection time Packing time Setups A-10 $148.76 123 6.60 1.20 0.80 A-25 $59.44 94 4.40 0.70 0.44 42 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, $2,375 for the A-10 model and $1,850 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 $82.65 114 6.0 1.2 0.76 21 A-25 $44.45 85 2.4 0.60 0.24 21 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

Answer-1:

PRODUCT COST UNDER ACTIVITY BASED COSTING A-10 A-25 5,850 $ Product price $ 1,975 Direct material 148.76 59.44 Overhead: Material handing Manufacturing supervision 369 282 100.32 150.48 Assembly cost Machine setup cost 608.85 465.3 1957.2 978.6 42 Inspection and testing cost 24.5 Packaging cost 20 11 $ 3,148 $ Total overhead cost 1,862 3,296 $ Total product cost 1,921 Product margin 2,554 $ 54

Answer-2(a):

PRODUCT COST BASED ON NEW ACTIVITY USAGE DATA A-10 A-25 Direct material 82.65 44.45 Overhead: Material handing 342 255 Manufacturing supervision 136.8 54.72 Assembly cost 564.3 420.75 Machine setup cost 978.6 978.6 Inspection and testing cost 42 21 Packaging cost 19 Total overhead cost 2,083 $ $ 1,736 Total product cost 2,165 $ 1,781

Answer-2(b):

PRODUCT COST BASED ON NEW ACTIVITY USAGE DATA A-10 A-25 Product price 2,375 $ $ 1,850 Direct material 82.65 44.45 Overhead: Material handing 255 342 Manufacturing supervision 136.8 54.72 Assembly cost 564.3 420.75 Machine setup cost 978.6 978.6 Inspection and testing cost 42 21 Packaging cost 19 Total overhead cost 2,083 $ 1,736 2,165 $ $ Total product cost 1,781 210 $ Product margin $ 69

Comment:- BSI can make a positive margin even if competitor lowest price is adopted with the new cost