Question

Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 20,500 units of one of its most popular products. Grant currently manufactures 41,000 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 $13 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		41,000		61,500
Manufacturing costs:
Direct materials	$	123,000	$	184,500
Direct labor		164,000		246,000
Factory overhead		328,000		430,500
Total manufacturing costs	$	615,000	$	861,000
Unit cost	$	15	$	14

Required

2. What is the relevant cost per unit? What do you think the minimum short-term bid price per unit should be? What would be the impact on short-term operating income if the order is accepted at the price recommended by the sales manager?

4. What would the total opportunity cost be if by accepting the special order the company lost sales of 5,700 units to its regular customers? Assume the preceding facts plus a normal selling price of $28 per unit.

Answer 1

Calculation of relevant cost cost at 41000 units cost at 61,500 units Total cost $ 675,000 $ 861,000 releveur coet 961,000 615,000 - $ 246,000 I relevant cost per unit = $246,000 20,500 - - $ 12 pea unit Minimum short-term pice should be $12 per unit → Short term operating fucome would increase $20,500 [20.500 units X (12-12) i p order is at $ 13 per unit by accepted » Tokel oppornenity cost = less of contribution on 5700 units order increase in operating income from new 5700 ( $28 - $15 ) - $20 500 74100 - 20500 $ 53,600