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# Assume that a division of Bose makes an electronic component for its speakers. Its manufacturing process for the component is a highly automated part

Assume that a division of Bose makes an electronic component for its speakers. Its manufacturing process for the component is a highly automated part of a just-in-time production system. All labor is considered to be an overhead cost, and all overhead is regarded as fixed with respect to output volume. Production costs for 115,000 units of the component: A small, local company has offered to supply the components at a price of \$ 4.20 each. If the division discontinued its production of the component, it would save one minus halfone−half of the supplies cost and \$22,000 of indirect-labor cost. All other overhead costs would continue. The division manager recently attended a seminar on cost behavior and learned about fixed and variable costs. He wants to continue to make the component because the variable cost of \$ 3.90 is below the \$ 4.20 bid. . Requirement 1. Compute the relevant cost of (a) making and (b) purchasing the component. Which alternative is less costly and by how much? (Leave unused cells blank. Enter the amounts as a positive number.) Direct materials Avoidable overhead costs: Indirect labor Supplies Allocated occupancy cost Purchase cost Total relevant costs

Requirement 2. What qualitative factors might influence the decision about whether to make or to buy the component? Companies using a just-in-time system need assurance of both ▼ decrease of fixed and variable costs increase of costs and forgone profits quality and timeliness of supplies of materials, parts, and components. Bose ▼ may may not be willing to “invest” \$31,000, the quantitative advantage of make the component, in order to ▼ ensure costs are kept down for an increase in revenue. ensure costs are kept down for an increase in revenue. have more control over the supply of the components .have more control over the supply of the components. make certain Bose does not forgo profits. make certain Bose does not forgo profits. REQUIRMENTS 1. Compute the relevant cost of (a) making and (b) purchasing the component. Which alternative is less costly and by how much? 2. What qualitative factors might influence the decision about whether to make or to buy the component? DATA Direct materials \$400,000 Factory overhead Indirect labor \$76,000 Supplies 60,000 Allocated occupancy cost 30,000 166,000 Total cost \$566,000 QUESTION TWO St. Gallen American School is an international private elementary school. In addition to regular classes, after-school care is provided between 3:00 pm and 6:00 pm at CHF 17 per child per hour. Financial results for the after-school care for a representative month are as follows: The director of St. GallenAmerican School is considering discontinuing the after-school care services because it is not fair to the other students to subsidize the after-school care program. He thinks that eliminating the program will free up CHF 950a month to support regular classes. … . Requirement 1. Compute the financial impact on St. Gallen American School from discontinuing the after-school care program. Begin by classifying each cost as either avoidable or unavoidable. (Leave unused cells blank.) Avoidable Unavoidable Now determine the increase or decrease in operating income should the school discontinue the after-school care program. (Use a minus sign or parentheses for a decrease in operating income.) Decrease in costs CHF Less: Decrease in revenues Increase (decrease) in operating income CHF Requirement 2. List three qualitative factors that would influence your decision. Qualitative factors to consider

Revenue, 450 hours at CHF 17 per hour CHF 7,650 Less Teacher salaries CHF 5,800 Supplies 700 Depreciation 1,400 Sanitary engineering 200 Other fixed costs 500 8,600 Operating income (loss) CHF (950) QUESTION 3 Upper AA Bicarb petrochemical factory produces two products, L and M, as a result of a particular joint process. Both products are sold to manufacturers as ingredients for assorted chemical products. Product L sells at split-off for \$0.10 per gallon; M sells for \$0.35 per gallon. Suppose that in April the 1,500,000 gallons of M could have been processed further into Super M at an additional cost of \$175,000 The Super M output would be sold for \$0.44 per gallon. Product L would be sold at split-off in any event. Requirement 1.Should M have been processed further in April and sold as Super M? Show your computations. Calculate the difference between selling at split-off as M and processing further as Super M in April (Leave unused cells blank. Use parentheses or a minus sign for a negative income effect.) Sell at split-off Process further as M as Super M Difference ? ? Less: Income effects for April Should M have been processed further in April and sold as Super M? Product M ▼ should should not have been processed further. . Separable costs before split-off Separable costs beyond split-off DATA FOR APRIL Joint processing cost \$2,000,000 Gallons produced and sold L 4,500,000 M 1,500,000