Question

Using the information for Headley Company from the previous problem, now assume there are no market constraints for either product, leaving the 250,000 labor hours as the only constraint and that Headley will make optimal use of its labor.  In early November, Headley was invited to bid on a contract to provide 2,000 units of Product B. What is the minimum bid Headley would have to submit in order to breakeven on the contract?

Product A                    Product B

Per Unit Information:

Selling Price/unit                                  $1,000                         $ 500

Direct Material Cost/unit $ 300                          $ 200

Direct Labor Cost (hours)/unit $ 200 (20 hrs) $ 100 (10 hrs)

Variable MO/unit ($4.00/hr) $   80 $ 40

Delivery Cost/unit $ 100                          $ 25

Fixed MO/unit ($2.00/hr)                      $   40 $ 20

Fixed Sell & Admin $   10 $ 5     

Budgeted Sales Units                            5,000 units                   15,000 units

Other Information:

• The maximum number of direct labor hours available in a year are 250,000.
• The market for product A is limited to 5,000 units per year, and the market for Product B is limited to 15,000 units per year- these market constraints are considered in the above budgeted sales units for the coming year.
• The variable and fixed manufacturing overhead rates shown above $4.00/hr and $2.00/hr, respectively, are based upon using direct labor hours as the cost driver.
• Fixed MO occurs evenly throughout the year and is considered unavoidable in the short term.
• Fixed Selling and Administrative costs shown above are considered unavoidable in the short run and were arbitrarily allocated to Products A and B based on their respective budgeted sales revenues.
• Delivery costs are always incurred for these products regardless of the customer purchasing them.

Use the information above to answer the next two questions.

Toward the end of the year it appears that the sales budget will be met. Thus, it appears the sales volume is going to be 5,000 units of Product A and 15,000 units of Product B. In early November, Headley was invited to bid on a contract to provide 2,000 units of Product B. What is the minimum bid Headley would have to submit in order to breakeven on the contract?

Group of answer choices

$1,000,000

$1,640,000

$1,050,000

$1,320,000

Answer 1

Total hours required for existing units:

Product A 5000*20 hours	100,000
Product B 15000*10	150,000
Total hours	250,000

Maximum available hours => 250,000

Hence we do not have extra Labor capacity. Thus we should sell the existing units of product B.

So we need to reover the variable costs as well as the fixed costs and then the profit margin. This will make the selling price. Thus the minimum bid shall be for 2000*500 =$ 100,000

Hence Option A is correct