Question

13-4. 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			$3.75	per part
Manufacturing supervision		Hours of machine time			$24.50	per hour
Assembly		Number of parts			$5.55	per part
Machine setup		Each setup			$48.60	per setup
Inspection and testing		Logged hours			$65.00	per hour
Packaging		Logged hours			$35.00	per hour

BSI currently sells the A–10 model for $3,250 and the A–25 model for $1,835. Manufacturing costs and activity usage for the two products follow:

	A-10			A-25
Direct materials		$143.76			$76.44
Number of parts		131			102
Machine-hours		9.00			6.00
Inspection time		2.00			1.10
Packing time		1.20			0.60
Setups		22			11

Required:

1. Calculate the product cost and product margin for each product.

1. Calculate the product cost and product margin for each product. (Round your answers to 2 decimal places.) A-10 -25 Product cost Product margin

2. A new competitor has entered the market for lens-polishing equipment with a superior product at significantly lower prices, $2,330 for the A–10 model and $1,715 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	$	98.65		$	52.45
Number of parts		130			101
Machine-hours		10.0			4.0
Inspection time		2.0			1.00
Packing time		1.00			0.40
Setups		11			11

2-a. Calculate the total product costs with the new activity usage data.

Answer 1

Bowman Specialists Inc. ( BSI)
Allocation of costs
A-10 model	Base usage	Activity Rate	Activity cost
Materials handling	131	3.75	491.25
Mfg. Supervision	9	24.5	220.5
Assembly	131	5.55	727.05
Machine setup	22	48.6	1069.2
Inspection	2	65	130
Packaging	1.2	35	42
Total			2680
Allocation of costs
A-25 model	Base usage	Activity Rate	Activity cost
Materials handling	102	3.75	382.5
Mfg. Supervision	6	24.5	147
Assembly	102	5.55	566.1
Machine setup	11	48.6	534.6
Inspection	1.1	65	71.5
Packaging	0.6	35	21
Total			1722.7
Req. 1
Product cost
	A-10 model	A-25 model
DM	143.76	76.44
OH	2680	1722.7
	2823.76	1799.14
Product margin
	A-10 model	A-25 model
Selling price	3250	1835
Less:- Cost	2823.76	1799.14
	426.24	35.86
Req. 2
Allocation of costs
A-10 model	Base usage	Activity Rate	Activity cost
Materials handling	130	3.75	487.5
Mfg. Supervision	10	24.5	245
Assembly	130	5.55	721.5
Machine setup	11	48.6	534.6
Inspection	2	65	130
Packaging	1	35	35
Total			2153.6
Allocation of costs
A-25 model	Base usage	Activity Rate	Activity cost
Materials handling	101	3.75	378.75
Mfg. Supervision	4	24.5	98
Assembly	101	5.55	560.55
Machine setup	11	48.6	534.6
Inspection	1	65	65
Packaging	0.4	35	14
Total			1650.9
Product cost
	A-10 model	A-25 model
DM	98.65	52.45
OH	2153.6	1650.9
	2252.25	1703.35