Question

Check my work Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 17,000 units of one of its most popular products. Grant currently manufactures 34,000 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 $12 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. 0.31 points eBook 34,000 51,000 References Units Manufacturing costs: Direct materials Direct labor Factory overhead Total manufacturing costs $ 136,000 170,000 170,000 $ 476,000 $ 14 $204,000 255,000 204,000 $663,000 $ 13 Unit cost 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 5,500 units to its regular customers? Assume the preceding facts plus a normal selling price of $26 per unit.

Answer 1

Answer with working is given below

1. Relevant cost per unit $11.00 Bid price per unit should be any price above Change in short term operating income $11.00 $17,000 increase $82,500 Total Opportunity Cost 2. Variable Overhead calculation Total cost Units $170,000 34,000 $ 204,000 51,000 $ 34,000 17,000 Variable cost per unit $2.00 (Change in Total cost/Change in output) Total Variable cost Total cost Fixed cost $68,000 $170,000 $102,000 Relevant cost per unit Direct Material Direct Labour $4.00 $5.00 Variable cost Total relevant cost per unit $2.00 $11.00 Fixed cost is sunk cost and not part of relevant cost The minimum short term bid should be equal to variable cost Bid price Less: Relevant Variable cost Net Contribution $12.00 $11.00 $1.00 Total Contribution $17,000 Net Income will increase by $17,000 Opportunity cost Special order units 5,500 Selling price Less: Relevant variable cost Contribution per unit $26.00 $11.00 $15.00 Total Contribtuion forgone for 5,500 units $82,500