Lens Care Inc. (LCI) manufactures specialized equipment for
polishing optical lenses. There are two models - one mainly used
for fine eyewear (F-32) and another for lenses used in binoculars,
cameras, and similar equipment (B-13).
The manufacturing cost of each unit is calculated using
activity-based costing, using the following manufacturing cost
pools:
| Cost Pools | Allocation Base | Costing Rate | ||
| Materials handling | Number of parts | $ | 2.40 | per part |
| Manufacturing supervision | Hours of machine time | $ | 14.80 | per hour |
| Assembly | Number of parts | $ | 3.30 | per part |
| Machine setup | Each setup | $ | 56.50 | per setup |
| Inspection and testing | Logged hours | $ | 45.50 | per hour |
| Packaging | Logged hours | $ | 19.50 | per hour |
LCI currently sells the B-13 model for $1,775 and the F-32 model for $1,220. Manufacturing costs and activity usage for the two products are as follows:
| B-13 | F-32 | ||||||
| Direct materials | $ | 164.50 | $ | 75.60 | |||
| Number of parts | 160 | 120 | |||||
| Machine hours | 7.90 | 4.20 | |||||
| Inspection time | 1.70 | 0.80 | |||||
| Packaging time | 0.90 | 0.50 | |||||
| Setups | 3 | 2 | |||||
If the market price for B-13 and F-32 are reduced to $1,695 and $1,095 respectively, and Lens Care wants to maintain market share and profitability, what is the target cost for B-13 and F-32 (round to nearest whole dollar)?
| B-13 | F-32 | ||||||
| A) | $ | 80 | $ | 120 | |||
| B) | $ | 1,378 | $ | 125 | |||
| C) | $ | 318 | $ | 856 | |||
| D) | $ | 1,378 | $ | 856 | |||
| E) | $ | 318 | $ | 422 | |||
Multiple Choice
Option C
Option E
Option A
Option D
Option B
Answer: Option (D.) B-13 $1378, F-32 $856
Calculation:
|
Cost |
B-13 |
F-32 |
|
Direct Material |
164.5 |
75.6 |
|
Material Handling |
384 (160*2.4) |
288 (120*2.4) |
|
Manufacturing Supervision |
116.92 (7.9*14.8) |
62.16 (4.2*14.8) |
|
Assembly |
528 (160*3.3) |
396 (120*3.3) |
|
Machine Setup |
169.5 (3*56.5) |
113 (2*56.5) |
|
Inspection and testing |
77.35 (1.7*45.5) |
36.4 (0.8*45.5) |
|
Packaging |
17.55 (0.9*19.5) |
9.75 (0.5*19.5) |
|
Total Cost-(A) |
1457.82 |
980.91 |
|
Selling Price-(B) |
1775 |
1220 |
|
Profit(B)-(A) |
317.18 |
239.09 |
|
Particulars |
B-13 |
F-32 |
|
Revised Selling Price |
1695 |
1095 |
|
Less: Desired Profit |
-317.18 |
-239.09 |
|
Target Cost |
1377.82 |
855.91 |
|
Rounding off to nearest |
1378 |
856 |
Note: Please feel free to ask any clarity or query on any point.
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