The Boom-Box Corporation produces high end speakers for commercial use. They make 3 different models. Under their old cost system, Tele-Vision allocated overhead costs based on direct labor dollars. Recently, the firm adopted an ABC cost system. The move to ABC was due to a price war in the market for special speakers used in dance clubs. The market price for a comparable speaker (DJ-Speakers) was $900. The Boom-Box Corporation could not figure out how their competitors were able to offer such low prices. The following data relates to these special speakers: DJ Speakers Annual Production 20,000 units Direct Materials $350 per unit Direct Labor $100 per unit Firm-wide Manufacturing Overhead Cost Pools: Cost Pool Cost Cost Driver Material Ordering $400,000 Number of purchase orders Material Inspection $300,000 Number of receiving reports Machine Setup $12,000,000 Number of setups Quality Control $500,000 Number of output units (1 inspection for every 20 units) Rent & other fixed costs $15,000,000 Direct labor costs Total overhead $28,200,000 Annual Activity Cost Pool All Products DJ Speakers Material Ordering 40,000 purchase orders 5,000 Material Inspection 2,500 receiving reports 700 Machine Setup 4000 setups 1000 Quality Control 100,000 output units 20,000 Rent & other fixed costs $5,000,000 DL cost (firm-wide cost) ? Required: a. Calculate the unit cost per DJ Speaker under the old cost system. b. Calculate the unit cost per DJ Speaker under the new ABC costing system. Can Boom-Box offer the market price? c. Would the results change if we used the number of inspections as the cost driver for quality control instead of number of unit? d. What should the firm do? Question 2: The Tele-Vision Corporation produces high end LCD flat screen HD-TVs. They make three different models. Under their old cost system, Tele-Vision allocated overhead costs based on direct labor dollars. Recently, the firm adopted an ABC cost system. The move to ABC was due to a price war in the market for 30? LCD in order to attract buyers for the World Cup. The market price for a comparable 30? LCD TV was $640. The 30? LCD unit of Tele-Vision could not figure out how their competitors were able to offer such low prices. The following data relates to one of their products, the 30? LCD: 30? LCD Annual Production 20,000 units Direct Materials $250 per unit Direct Labor $45 per unit Firm wide Manufacturing Overhead cost pools: Cost Pool Cost Cost Driver Material Ordering $900,000 Number of Purchase orders Material Inspection $300,000 Number of receiving reports Machine Setup $6,000,000 Number of Setups Quality Control $900,000 Number of output Units (1 inspection for every 20 units) Rent & other fixed costs $12,000,000 Direct Labor Costs Total overhead $20,100,000 Annual Activity Cost Pool All Products 30? LCD Material Ordering 300,000 Purchase Orders 100,000 Material Inspection 2,000 receiving reports 500 Machine Setup 6000 setups 150 Quality Control 80,000 output Units 20,000 Rent & other fixed costs $2,000,000 DL cost $900,000 Required: 1. Calculate the unit cost per 30? LCD TV under the old cost system. 2. Calculate the unit cost per 30? LCD TV under the new ABC costing system. Can Tele-Vision offer the market price? 3. Would the results change if we used the number of inspections as the cost driver for quality control instead of number of unit? 4. A large corporation in NY has made an offer to purchase 500 LCD screen at a unit price of $600. Assume that the firm is not at capacity. What additional information do you need to decide whether or not the firm should accept the offer? (Assume that the lower price for this deal will not affect the market price). No calculations required

Question 1: The Boom-Box Corporation produces high end speakers for commercial use. They make 3 different models. Under their old cost system, Tele-Vision allocated overhead costs based on direct labor dollars. Recently, the firm adopted an ABC cost system. The move to ABC was due to a price war in the market for special speakers used in dance clubs. The market price for a comparable speaker (DJ-Speakers) was $900. The Boom-Box Corporation could not figure out how their competitors were able to offer such low prices. The following data relates to these special speakers: DJ Speakers Annual Production Direct Materials Direct Labor 20,000 units $350 per unit $100 per unit Firm-wide Manufacturing Overhead Cost Pools: Cost Pool Material Ordering Material Inspection Machine Setup Quality Control Rent & other fixed costs Total overhead Cost $400,0 00 $300,0 00 $12,00 0,000 $500,0 00 $15,00 0,000 $28,20 0,000 Cost Driver Number of purchase orders Number of receiving reports Number of setups Number of output units (1 inspection for every 20 units) Direct labor costs Annual Activity Cost Pool Material Ordering Material Inspection Machine Setup Quality Control Rent & other fixed costs All Products 40,000 purchase orders 2,500 receiving reports 4000 setups 100,000 output units $5,000,000 DL cost (firmwide cost) Required: a. Calculate the unit cost per DJ Speaker under the old cost system. DJ Speakers 5,000 700 1000 20,000 ? b. Calculate the unit cost per DJ Speaker under the new ABC costing system. Can Boom-Box offer the market price? c. Would the results change if we used the number of inspections as the cost driver for quality control instead of number of unit? d. What should the firm do? 2 Question 2: The Tele-Vision Corporation produces high end LCD flat screen HD-TVs. They make three different models. Under their old cost system, Tele-Vision allocated overhead costs based on direct labor dollars. Recently, the firm adopted an ABC cost system. The move to ABC was due to a price war in the market for 30\" LCD in order to attract buyers for the World Cup. The market price for a comparable 30\" LCD TV was $640. The 30\" LCD unit of Tele-Vision could not figure out how their competitors were able to offer such low prices. The following data relates to one of their products, the 30\" LCD: 30\" LCD Annual Production Direct Materials Direct Labor 20,000 units $250 per unit $45 per unit Firm wide Manufacturing Overhead cost pools: Cost Pool Cost Material Ordering $900,000 Material Inspection $300,000 Machine Setup $6,000,000 Quality Control Rent & other fixed costs Total overhead Annual Activity Cost Pool Material Ordering Material Inspection Machine Setup Quality Control Rent & other fixed costs Cost Driver Number of Purchase orders Number of receiving reports Number of Setups $900,000 Number of output Units (1 inspection for every 20 units) $12,000,000 $20,100,000 Direct Labor Costs All Products 300,000 Purchase Orders 2,000 receiving reports 6000 setups 80,000 output Units $2,000,000 DL cost 30\" LCD 100,000 500 150 20,000 $900,000 Required: 1. Calculate the unit cost per 30\" LCD TV under the old cost system. 2. Calculate the unit cost per 30\" LCD TV under the new ABC costing system. Can Tele-Vision offer the market price? 3. Would the results change if we used the number of inspections as the cost driver for quality control instead of number of unit? 4. A large corporation in NY has made an offer to purchase 500 LCD screen at a unit price of $600. Assume that the firm is not at capacity. What additional information do you need to decide whether or not the firm should accept the offer? (Assume that the lower price for this deal will not affect the market price). No calculations required. 3