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, $940 for the A-10 model and $685 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-25 $ 51.45 Direct materials Number of parts Machine-hours Inspection time Packing time Setups A-10 $ 87.65 110 81 5.0 2.0 1.0 0.50 0.70 1 0.20 1 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? 3. Assume the information in requirement 2, but further assume that BSI management is not satisfied with the gross margin on the A-10 after the cost improvements. BSI wants a minimum of $85 gross margin on A-10. Suppose you are able to change the number of parts to reduce costs further. 4. What cost management method might be useful to BSI at this time? Bowman Specialists Incorporated (BSI) manufactures specialized equipment for polishing optical lenses. There are two models-one (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 how the manufacturing cost of each unit is calculated, using activity-based costing, for these manufacturing cost pools. Cost Pools Materials handling Manufacturing supervision Assembly Machine setup Allocation Base Number of parts Hours of machine time Number of parts Each setup Costing Rate $2.25 per part Inspection and testing Packaging Logged hours Logged hours $ 24.10 per hour $ 3.15 per part $ 50.60 per setup $ 35.00 per hour $ 15.00 per hour BSI currently sells the A-10 model for $1,230 and the A-25 model for $815. Manufacturing costs and activity usage for the two products follow: Direct materials Number of parts Machine hours Inspection time Packing time Setups A-10 $ 152.76 A-25 $ 75.44 121 92 6.00 4.00 1.00 0.60 0.70 0.40 2 1

Reducir, Inc., produces two different types of hydraulic cylinders. Reducir produces a major subassembly for the cylinders in the Cutting and Welding Department. Other parts and the subassembly are then assembled in the Assembly Department. The activities, expected costs, and drivers associated with these two manufacturing processes are given below. Note: In the assembly process, the materials-handling activity is a function of product characteristics rather than batch activity. Other overhead activities, their costs, and drivers are listed below. Other production information concerning the two hydraulic cylinders is also provided: Required: 1. Using a plantwide rate based on machine hours, calculate the total overhead cost assigned to each product and the unit overhead cost. 2. Using activity rates, calculate the total overhead cost assigned to each product and the unit overhead cost. Comment on the accuracy of the plantwide rate. 3. Calculate the global consumption ratios. 4. Calculate the consumption ratios for welding and materials handling (Assembly) and show that two drivers, welding hours and number of parts, can be used to achieve the same ABC product costs calculated in Requirement 2. Explain the value of this simplification. 5. Calculate the consumption ratios for inspection and engineering, and show that the drivers for these two activities also duplicate the ABC product costs calculated in Requirement 2.

Larsen, Inc., produces two types of electronic parts and has provided the following data: There are four activities: machining, setting up, testing, and purchasing. Required: 1. Calculate the activity consumption ratios for each product. 2. Calculate the consumption ratios for the plantwide rate (direct labor hours). When compared with the activity ratios, what can you say about the relative accuracy of a plantwide rate? Which product is undercosted? 3. What if the machine hours were used for the plantwide rate? Would this remove the cost distortion of a plantwide rate?

Electan Company produces two types of printers. The company uses ABC, and all activity drivers are duration drivers. Electan Company is considering using DBC and has gathered the following data to help with its decision. A. Activities with duration drivers: B. Activities with consumption ratios and costs: C. Products with cycle time and practical capacity: Required: 1. Using cycle time and practical capacity for each product, calculate the total time for all primary activities. Comment on the relationship to ABC. 2. Calculate the overhead rate that DBC uses to assign costs. Comment on the relationship to a unit-based plantwide overhead rate. 3. Use the overhead rate calculated in Requirement 2 to calculate (a) the overhead cost per unit for each product, and (b) the total overhead assigned to each product. How does this compare to the ABC assignments shown in Part B of the Information set? 4. What if the units actually produced were 10,000 for Printer A and 18,000 for Printer B. Using DBC, calculate the cost of unused capacity.