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Gomez Electronics produced three models of portable compact-disc (CD) players, which it sold under its own brand name. It sold Model A for $47.00, Model

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Gomez Electronics produced three models of portable compact-disc (CD) players, which it sold under its own brand name. It sold Model A for $47.00, Model B for $52.00, and Model C for S37.00. The company had three production departments: Department 1 performed the component assembly, Department 2 performed the chassis assembly, and Department 3 performed the final assembly, where the headphones, controls, and purchased plastic case were added to the CD player. Models A and B went through all three departments, but Model C was handled by Department 3 only. For this model, a Japanese chassis was purchased in 1,000-unit lots, and was assembled with a unique purchased case that Gomez Electronics had designed Model C had been added to the company's product line in 1999 to take advantage of excess production capacity in Department 3 and to extend the company's product line to a less expensive CD player. Departments 1 and 2 worked two shifts, and management did not believe a third shift would be needed anytime soon. Department 3 worked a single shift, and even after the addition of Model C, operated slightly above 50% of physical capacity The company used a full-cost, standard costing system. Standard costs were reviewed and, if necessary, revised annually. Exhibits and 2 contain information regarding standard costs, budgets, production, sales, and actual costs and expenses. Ending inventories were costed at standard cost. Although the company's president had been reasonably satisfied with the existing costing system, she was evaluating the benefits of changing to a standard, direct costing system for internal company use In January 2003, the company received an offer to supply a large discount company with 5,000 CD players similar to the present Model C. Deliveries were to be made at a rate of 1,000 a month beginning in March. The only difference between this CD player and the company's Model C player was a different plastic case costing S2.00 per unit less than the case used in the Model C player. The president knew that the cheaper case was available in sufficient quantity The discount company offered to pay Gomez Electronics S28.75 for each CD player, and the president did not expect this cheaper model to affect sales of the company's Model C player. In this case, "direct costing" is the same as "variable costing

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