Question

Accepting Business at a Special Price

Forever Ready Company expects to operate at 82% of productive capacity during July. The total manufacturing costs for July for the production of 31,980 batteries are budgeted as follows:

Direct materials	$293,600
Direct labor	107,900
Variable factory overhead	30,230
Fixed factory overhead	60,000
Total manufacturing costs	$491,730

The company has an opportunity to submit a bid for 3,000 batteries to be delivered by July 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during July or increase the selling or administrative expenses.

What is the unit cost below which Forever Ready Company should not go in bidding on the government contract? Round your answer to two decimal places.
$ per unit

Answer 1

Production of Batteries = 31,980

Production Capacity = 82%

Total Production capacity in batteries =

31,980 / 82% = 39,000

Therefore, more 3,000 units can be produced without increasing Fixed Factory Expenses.

Therefore, cost per unit to be incurred for additional 3,000 batteries =

Direct Materials = 293,600 / 31,980 = $9.18

Direct Labours = 107,900 / 31,980 = $3.37

Variable Factory Expenses = 30,230 / 31,980 = $0.95

Therefore, Total Variable Cost per unit = $13.5

The unit cost below which Ready Company should not go for bidding = $13.5

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