Question

Accepting Business at a Special Price

Forever Ready Company expects to operate at 85% of productive capacity during July. The total manufacturing costs for July for the production of 29,750 batteries are budgeted as follows:

Direct materials	$449,100
Direct labor	165,100
Variable factory overhead	46,250
Fixed factory overhead	92,000
Total manufacturing costs	$752,450

The company has an opportunity to submit a bid for 2,000 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

Since the organisation is operating at the capacity which is lower than its full capacity, no fixed cost will be incurred to produce additional 2,000 batteries .

Therefore for calculation of the unit cost below which Forever Ready Company should not go in bidding on the government contract, only variable cost should be considered .

Total variable cost = Direct materials + Direct labor + Variable factory overhead

= $449,100 + $165,100 + $46,250

= $660450

per unit variable cost = $660,450 / 29,750

= $ 22.20

Forever Ready Company should not go in bidding on the price below $ 22.20 per unit ( $44,400 for 2000 batteries ) .