Question

Lens Care Inc. (LCI) manufactures specialized equipment for polishing optical lenses. There are two models - one mainly used for fine eyewear 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 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 $ 4.20 per part $14.98 per hour $ 4.2e per part $57.49 per setup $ 46.48 per hour $ 20.40 per hour 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 $ Direct materials Number of parts Machine hours Inspection time Packaging time Setups B-13 $165.40 178 8.80 3.50 1.89 F-32 76.32 138 4.38 2.60 1.40 32 are reduced to $5745 and 56,135 respectively, and Lens Cote wants to maintain tarket share and profitability what If the market price for B-13 and dollar)? A) B) c) D) E) B-13 $ 844.00 $2,142.00 $1,082.00 $2,142.00 $1,082.00 F-32 $ 762.00 $ 767.00 $1,498.00 $1,498.ee $1,064.ee

Answer 1

Solution:
Calculation of Profit Margin under Current Selling Price using Activity Based Costing:
			B-13	F-32
Direct Material (A)			$165.40	$76.32
			(Given)
Material Handling (B)		(No of parts *Rate per part)	$747.60	$579.60
			($4.2*178)	($4.2*138)
Manufacturing supervision ( C )		(No of Machine hour*Rate per hour)	$131.82	$65.61
			($14.98*8.8)	($14.98*4.38)
Assembly (D)		(No of parts *Rate per part)	$747.60	$579.60
			($4.2*178)	($4.2*138)
Machine set up ( E )		(No of Set up *Rate per set up)	$229.60	$172.20
			($57.4*4)	($57.4*3)
Inspection and testing (F)		(No of Inspection time *Rate per hour)	$162.40	$120.64
			($46.4*3.5)	($46.4*2.6)
Packaging (G)		(No of Packinging time *Rate per hour)	$36.72	$28.56
			($20.4*1.8)	($20.4*1.4)
		Total Cost (A+B+C+D+E+F+G)	$2,222.14	$1,622.53
		Selling Price	$5,825	$6,260
		Less:Total Cost	($2,222.14)	($1,622.53)
		Profit	3,602.86	4,637.47
To calculate target cost , we would have to maintain the same profit:
			B-13	F-32
		Selling Price (Given)	$5,745	$6,135
		Less:Profit	($3,602.86)	($4,637.47)
		Target Cost	$2,142	$1,498
Target Cost = d) B-13 $2142.00 , F-32 $1498.00