Your company produces 700,000 widgets per year but has the capacity to produce 950,000 units.Company records show the following; full product costs = $85 per unit, which includes fixed manufacturing overhead of $11, and variable overhead of $4 per unit, and direct variable costs of $22, all based on the current 700,000 production run.If the company wanted to bid on a special one-time order, based on the above information only, what would be its minimum bid?
A)$59
B)$81
C)$63
D)$74
E)$85

Question

Quizplus · Accepted Answer

To determine the minimum bid price, we need to consider the variable costs of producing an additional 250,000 units (950,000 - 700,000).

The variable cost per unit is currently $4 for overhead and $22 for direct variable costs, making a total variable cost of $26 per unit.

Multiplying $26 by 250,000 units, we get a total variable cost of $6,500,000.

Adding the fixed overhead cost of $11 per unit, we get a total cost per unit of $85 + $11 = $96.

Multiplying $96 by 250,000 units, we get a total cost of $24,000,000.

Therefore, the minimum bid price to cover all costs and not lose money would be $24,000,000 / 250,000 units = $96 per unit. However, to make a profit, the company would need to add a markup to the cost.

The answer options are all below $96, so we need to pick the one that is closest to it. Option D is the closest at $74, but it is still significantly below the minimum bid price, so the company would likely need to sell at a loss or try to negotiate a higher price.

Your Company Produces 700,000 Widgets Per Year but Has the Capacity