Question

Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 21,000 units of one of its most popular products. Grant currently manufactures 42,000 units of this product in its Loveland, Ohio, plant. The plant is operating at 50% capacity. There will be no marketing costs on the special order. The sales manager of Grant wants to set the bid at $14 because she is sure that Grant will get the business at that price. Others on the executive committee of the firm object, saying that Grant would lose money on the special order at that price.

Units		42,000		63,000
Manufacturing costs:
Direct materials	$	147,000	$	220,500
Direct labor		189,000		283,500
Factory overhead		336,000		441,000
Total manufacturing costs	$	672,000	$	945,000
Unit cost	$	16	$	15

Required

2. What would be the Relevant cost per unit if the order is accepted at the price recommended by the sales manager?

3. What do you think the minimum (short-term) bid price should be?

4. What would the total opportunity cost be if by accepting the special order the company lost sales of 5,800 units to its regular customers? Assume the preceding facts plus a normal selling price of $30 per unit.

Answer 1

2. Variable factory overhead cost per unit = $ ( 441,000 - 336,000) / ( 63,000 - 42,000 ) = $ 5 per unit.

Fixed factory overhead of $ 126,000 is not relevant cost, because it remains unchanged beween the two alternatives.

Therefore, the relevant cot per unit is $ ( 147,000 + 189,000 + 210,000) / 42,000 = $ 13 per unit.

3. The minimum bid price should be $ 13, at which level the company neither makes nor loses money.

4. Total opportunity cost of acceptance of a special order = contribution margin on lost sales = $ ( 30 - 13) x 5,800 = $ 98,600.