Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two modelsone (A25) principally used for fine eyewear and the other (A10) 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 $ 2.85 per part Manufacturing supervision Hours of machine time $ 23.90 per hour Assembly Number of parts $ 3.75 per part Machine setup Each setup $ 46.20 per setup Inspection and testing Logged hours $ 47.00 per hour Packaging Logged hours $ 23.00 per hour BSI currently sells the A10 model for $1,690 and the A25 model for $1,200. Manufacturing costs and activity usage for the two products follow: A-10 A-25 Direct materials $ 135.76 $ 70.44 Number of parts 125 96 Machine-hours 7.20 4.80 Inspection time 1.40 0.80 Packing time 0.90 0.48 Setups 10 5

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, $1,390 for the A10 model and $1,045 for the A25 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 $ 86.65 $ 46.45 Number of parts 118 89 Machine-hours 7.0 2.8 Inspection time 1.4 0.70 Packing time 0.82 0.28 Setups 5 5

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?