Question

Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 24,000 units of one of its most popular products. Grant currently manufactures 48,000 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.

Units		48,000		72,000
Manufacturing costs:
Direct materials	$	144,000	$	216,000
Direct labor		192,000		288,000
Factory overhead		336,000		432,000
Total manufacturing costs	$	672,000	$	936,000
Unit cost	$	14	$	13

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 6,600 units to its regular customers? Assume the preceding facts plus a normal selling price of $26 per unit.

Answer 1

Solution:

2)

Direct materials(144,000/42,000)	3.43
Direct labor(192,000/42,000)	4.57
Variable factory over head(432,000-336,000)/(72,000 - 48,000)	4.00
Relevant cost per unit	12.00

Bid price should be any price above 12.00

4)

Total opportunity cost be = 6,600*(26-12) = 92,400