Question

Imperial Devices (ID) has offered to supply the state government with one model of its security screening device at "cost plus 20 percent." ID operates a manufacturing plant that can produce 22,000 devices per year, but it normally produces 20,000. The costs to produce 20,000 devices follow:

Total Cost Cost per Device Production costs: Materials $ 1,180,000 $ 59.00 Labor 1,740,000 87.00 Supplies and other costs that will vary with production 700,000 35.00 Indirect cost that will not vary with production 580,000 29.00 Variable marketing costs 1,840,000 92.00 Administrative costs (will not vary with production) 1,280,000 64.00 Totals $ 7,320,000 $ 366.00

Based on these data, company management expects to receive $439.20 (= $366.00 × 120 percent) per monitor for those sold on this contract. After completing 2,000 monitors, the company sent a bill (invoice) to the government for $878,400 (= 2,000 monitors × $439.20 per monitor).

The president of the company received a call from a state auditor, who stated that the per monitor cost should be:

Materials $ 59.00

Labor 87.00

Supplies and other costs that will vary with production 35.00 $

total :181.00

Therefore, the price per monitor should be $217.20 (= $181.00 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual selling channels.

Required: For each of the four situations, calculate the cost basis per device based on the information shown above. What price would you recommend? (Round intermediate calculations and final answers to 2 decimal places.) Options:

A. Only the differential production costs could be considered as the cost basis.

B. The total cost per device for normal production of 20,000 devices could be used as the cost basis.

C. The total cost per device for production of 22,000 devices, excluding marketing costs, could be used as the cost basis.

D. The total cost per device for production of 22,000 devices, including marketing costs, could be used as the cost basis.

Option A Per device cost basis Recommended price per device

Option B

Option C

Option D

Answer 1

	Per device cost basis	Recommended Price Per Device
Option A	181	217.20
Option B	366	439.20
Option C	265.54	318.65
Option D	357.54	429.05

Costs		Unit Cost Options(One Unit = One Device)
		A	B	C	D
Materials (variable)	59	59	59	59	59
Labor (variable)	87	87	87	87	87
Supplies (variable)	35	35	35	35	35
Indirect costs (fixed)	580,000	-	29 (580000/20000)	26.36 (580000/22000)	26.36 (580000/22000)
Marketing (variable)	92	-	92	-	92
Administrative (fixed)	1280000	-	64 (1280000/20000)	58.18 (1280000/22000)	58.18 (1280000/22000)
Per device cost basis		181	366	265.54	357.54
Per device price (Cost + 20%)		217.20 (181*1.20)	439.20 (366*1.20)	318.65 (265.54*1.20)	429.05 (357.54*1.20)