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 PoolsAllocation BaseCosting RateMaterials handlingNumber of parts$3.70per partManufacturing supervisionHours of machine time$24.20per hourAssemblyNumber of parts$6.00per partMachine setupEach setup$48.00per setupInspection and testingLogged hours$56.00per hourPackagingLogged hours$26.00per hour

BSI currently sells the A-10 model for $4,030 and the A-25 model for $2,010. Manufacturing costs and activity usage for the two products follow:

A-10A-25Direct materials$147.76$73.44Number of parts130101Machine-hours8.705.80Inspection time1.901.05Packing time1.150.58Setups2814

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, $2,410 for the A-10 model and $1,885 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-10A-25Direct materials$96.65$51.45Number of parts12899Machine-hours9.53.8Inspection time1.90.95Packing time0.970.38Setups1414

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?