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The calculation made by HUB for the standard cost of manufacturing the component totalled $ 1.02 each. On this basis the management of the company decided to continue to purchase components from their outside suppliers, this meant a total saving of $ 2000 per annum. HUB has received a letter from the supplier of these special components that because of increased in costs they will in future have to charged $ 1.17 per components. So, HUB decided to investigate the costs of producing these components themselves. This time they found that the material costs has increased by 10%, wages by 20%, and overheads, which were now running at $ 134,000 per annum would increase to $ 140,000 per annum if the component was produced. New calculations showed that the costs of producing the components would increase by $0.18 per component against $ 0.17 increase required by the outside manufacturer. Thus, it was considered wiser still to purchase the components.

You are required to

(a)Show, with calculation, how Hub arrived at the initial standard costs of $1.02 per component and the revised standard cost of $1.20.

(b)Explain whether the management of Hub used the relevant costs in reaching each decision? If you do not think so, show the costs that you would have used and state whether you agree with the decisions.

(c)Assuming that the costs of purchasing or producing the special components were the same, or very similar, what are the major advantages of making the products.

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