Question

Accepting Business at a Special Price

Power Serve Company expects to operate at 85% of productive capacity during July. The total manufacturing costs for July for the production of 27,200 batteries are budgeted as follows:

Direct materials	$390,300
Direct labor	143,500
Variable factory overhead	40,120
Fixed factory overhead	80,000
Total manufacturing costs	$653,920

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 Power Serve Company should not go in bidding on the government contract? Round your answer to two decimal places.
$ per unit

Answer 1

Unit cost below which Power serve company should not go in bidding contract is calculated as:

Variable cost is only relevant for this decision making as fixed costs has to be incurred whether the contract would be taken or not.

Thus,

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

Total manufacturing cost=$390,300+$143,500+$40,120

Total manufacturing cost=$573,920

Variable cost per unit=$573,920/27,200

Variable cost per unit=$21.1 per unit

The Power Serve Company should not got below $21.1 per unit.