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 120,000 units of the component are as follows:

A small, local company has offered to supply the components at a price of $5.40 each. If the division discontinued its production of the component, it would save onehalf of the supplies cost and $24,000 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 $3.80 is below the $5.40 bid.

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