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 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 $ 3.45 per part

Manufacturing supervision Hours of machine time $ 24.30 per hour

Assembly Number of parts $ 4.95 per part

Machine setup Each setup $ 47.80 per setup

Inspection and testing Logged hours $ 59.00 per hour

Packaging Logged hours $ 31.00 per hour

BSI currently sells the A-10 model for $2,730 and the A-25 model for $1,695. Manufacturing costs and activity usage for the two products follow:

A-10 A-25

Direct materials $137.76 $74.44

Number of parts 129 100

Machine-hours 8.40 5.60

Inspection time 1.80 1.00

Packing time 1.10 0.56

Setups 18 9

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, $2,010 for the A-10 model and $1,460 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 $94.65 $ 50.45

Number of parts 126 97

Machine-hours 9.0 3.6

Inspection time 1.8 0.90

Packing time 0.94 0.36

Setups 9 9

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?