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:
1. What is the relevant cost per unit and the bid price?
2. What would the total opportunity cost be if by accepting the special order the company lost sales of 6,500 units to its regular customers?

Answer 1

Answer:

Missing word "What would the total opportunity cost be if by accepting the special order the company lost sales of 6,500 units to its regular customers? Assume the above facts plus a normal selling price of $24 per unit."

Variable factory overhead per unit = (430,500 - 328,000) / 20,500 = $5

Direct materials per unit = $123,000 / 41,000 = $3

Direct labor per unit = 164,000 / 41,000 = $4

1. Relevant cost per unit = Direct materials per unit + Direct labor per unit + Variable factory overhead

Relevant cost per unit = $5 + $4 + $3

Relevant cost per unit = $12

So, the bid price should be above $10 per unit

2. Total opportunity cost would be the total contribution margin lost for the lost sales to the regular customer

Total opportunity cost = Loss of regular sales revenue - Total relevant cost for lost sales

Total opportunity cost = (6,500*$24) - (6,500*$12)

Total opportunity cost = $156,000 - $78,000

Total opportunity cost = $78,000