Chris Collins was a supervisor of an assembly department in Dexter Electronics Company.In recent weeks, Collins had become convinced that a certain component, number S-36, could be produced more efficiently if certain assembly methods changes were made.Collins had described this proposal to the company's industrial engineer, but the engineer had quickly dismissed Collin's ideasmainly, Collins thought, because the engineer had not thought of them first.

Collins had frequently thought of starting a business, and felt that the ability to produce the S-36 component at a lower cost might provide this opportunity. Dexter's purchasing agent assured Collins that Dexter would be willing to buy S-36s from Collins if the price were 10-15 percent below Dexter's currentcost of P1.65 per unit.Working at home, Collins experimented with the new methods, which were based on the use of a new fixture to aid in assembling each S-36.This experimentation seemed successful, so Collins proceeded to prepare some estimates for large-scale S-36production.Collins determined the following:

1.A local toolmaker would make the new fixtures for a price of P500 each. One fixture would be needed for each assembly worker.

2.Assembly workers were readily available, on either a full-time or part-time basis, at a wage of P3.75 per hour.Collins felt that another 20 percent of wages would be necessary for fringe benefits. Collins estimated that on the average (including rest breaks), a worker could assemble, test, and pack 15 units of the S-36 per hour.

3.Purchased components for the S-36 should cost about P0.85 per unit over the next year. Shipping supplies anddelivery costs would amount to approximately P0.05 per unit.

4.Suitable space was available for assembly operations at a rental of P600 per month. A 12-month lease was required.

5.Assembly tables, stools, and other necessary equipment would cost about P300 per assembly worker.

6.Collins, as general manager, would receive a salary of P2,000 per month.

7.A combination office manager-bookkeeper was available for a salary of P900 per month.

8.Miscellaneous costs, including maintenance, supplies and utilities were expected to average about P325 per month.

9.Dexter Electronics would purchase between 400,000 and 525,000 units of S-36 a year, with 450,000 being Dexter's purchasing agent's "best guess."However, Collins would have to commit to a price of P1.40 per unit for the next 12 months.

Collins showed these estimates to a friend who was a cost analyst in another electronics firm. This friend said that all of the estimates appeared reasonable, but told Collins that in addition to the required investment in fixtures and equipment, about P70,000 would be needed to finance accounts receivable and inventories.The friend also advised buying enough fixtures and other equipment to enableproducing the maximum estimated volume (525,000 units per year) on a one-shift basis (assuming 2,000 labor hours per assembler per year). Collins thought this was good advice.

Questions: Based on the given data above answer the following:

1.What are Collin's expected variable costs per unit? Fixed costs per month? What would the total cost per year of Collins' business be if volume was 400,000 units? 450,000 units? 525,000 units? (Limit yourself to cash costs; ignore depreciation of fixtures and equipment. Also, disregard any interest costs Collins might incur on borrowed funds).

2.What is the average cost per unit of S-36 at each of these three volumes?

3.Prepare Income Statement using your computations of variable costs and fixed costsin number 1under the following conditions:

a.450,000 units ofS-36are soldat a price of P1.40 per unit.

b.15 Assembly workers are guaranteed by 2,000 hours of pay per year @ 6.75 per hour including fringes.

4.Should Chris Collins should resign from Dexter Electronics and form his ownenterprise? Why yes, and Why not?