Target Costing Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two modelsone (A-25) principally used for fine eyewear and the other (A-10) for lenses used in binoculars, cameras, and similar equipment.
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 | $2.25 per part |
Manufacturing supervision | Hours of machine time | $23.50 per hour |
Assembly | Number of parts | $2.55 per part |
Machine setup | Each setup | $44.60 per setup |
Inspection and testing | Logged hours | $35.00 per hour |
Packaging | Logged hours | $15.00 per hour |
BSI currently sells the A-10 model for $1,050 and the A-25 model for $725. Manufacturing costs and activity usage for the two products follow:
| A-10 | A-25 |
Direct materials | $143.76 | $66.44 |
Number of parts | 121 | 92 |
Ma chine-hours | 6 | 4 |
Inspection time | 1 | 0.6 |
Packing time | 0.7 | 0.4 |
Setups | 2 | 1 |
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, $825 for the A-10 model and $595 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:
| A-1 0 | A-25 |
Direct materials | $78.65 | $42.45 |
Number of parts | 110 | 81 |
Ma chine-hours | 5 | 2 |
Inspection time | 1 | 0.5 |
Packing time | 0.7 | 0.2 |
Setups | 1 | 1 |
Calculate the total product costs with the new activity usage data. Can BSI make a positive gross margin with the new costs, assuming that it must meet the price set by the new competitor?
3. Assume the information in requirement 2, but that BSI management is not satisfied with the gross margin on the A−10 after the cost improvements. BSI wants a $50 gross margin on A−10. Suppose you are able to change the number of parts to reduce costs further to achieve the desired $50 margin. How much would the number of parts have to change to provide the desired gross margin? [Hint: Use the Excel Goal Seek function.]
4. What cost management method might be useful to BSI at this time, and why?
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