Question

Power Serve Company expects to operate at 85% of productive capacity during April The total manufacturing costs for April for the production of 30,000 batteries are budgeted as follows:

Direct materials $285,000

Direct labor 104,000

Variable factory overhead 31,000

Fixed factory overhead 58,000

Total manufacturing costs $478,000

The company has an opportunity to submit a bid for 2000 batteries to be delivered by April 30 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during April or increase the selling or administrative expenses.

Describe, in words, what the lowest bid should be and why. Include qualitative reasons as well as the quantitative reasons.

Then provide calculations.

Answer 1

The lowest bid should be the relevant cost that is needed to make the 2000 batteries as this is the minimum that is incurred on the batteries to be made.

The quantitative reason can be the company will be able to operate at optimal capacity having better economies of scale and thus it will lower cost.

The increase in quantity can improve the quality of products produced.

The minimum cost for the bid is:

Direct material	19000	(285000/30000)*2000
Direct labor	6933.333	(104000/30000)*2000
Variable factory overhead	2066.667	(31000/30000)*2000
Minimum bid amount	28000