Question

Headley Company produces two products, A and B. Budgeted financial information for the coming year related to these two products follows:

Product A                    Product B

Per Unit Information:

Selling Price/unit                                  $1,000                         $ 500

Direct Material Cost/unit $ 300                          $ 200

Direct Labor Cost (hours)/unit $ 200 (20 hrs) $ 100 (10 hrs)

Variable MO/unit ($4.00/hr) $   80 $ 40

Delivery Cost/unit $ 100                          $ 25

Fixed MO/unit ($2.00/hr)                      $   40 $ 20

Fixed Sell & Admin $   10 $ 5

Budgeted Sales Units                            5,000 units                   15,000 units

Other Information:

• The maximum number of direct labor hours available in a year are 250,000.
• The market for product A is limited to 5,000 units per year, and the market for Product B is limited to 15,000 units per year- these market constraints are considered in the above budgeted sales units for the coming year.
• The variable and fixed manufacturing overhead rates shown above $4.00/hr and $2.00/hr, respectively, are based upon using direct labor hours as the cost driver.
• Fixed MO occurs evenly throughout the year and is considered unavoidable in the short term.
• Fixed Selling and Administrative costs shown above are considered unavoidable in the short run and were arbitrarily allocated to Products A and B based on their respective budgeted sales revenues.
• Delivery costs are always incurred for these products regardless of the customer purchasing them.

Use the information above to answer the next two questions.

Toward the end of the year it appears that the sales budget will be met. Thus, it appears the sales volume is going to be 5,000 units of Product A and 15,000 units of Product B. In early November, Headley was invited to bid on a contract to provide 2,000 units of Product B. What is the minimum bid Headley would have to submit in order to breakeven on the contract?

Group of answer choices

$680,000

$730,000

$1,000,000

$780,000

Answer 1

Minimum bid amount to be submitted by Headly in order to break-even on the contract:

In evaluating the special order, only the relevant cost needs to be considered. Relevant cost shall be the cost that are to be incurred additionally and are avoidable if the order is not accepted. Fixed manufacturing overhead and fixed selling and administration cost is not be considered as relevant cost, as it is clearly stated in the question that these costs are unavoidable.

Therefore the minimum bid to be quoted will be:

	Product B ($)
Direct material cost per unit	$200
Direct labor cost per unit	$100
Variable manufacturing overhead per unit	$40
Delivery cost per unit	$25
Total Cost per unit	$365
Units ordered	2,000 units
Total Cost to be quoted to break-even	$730,000

Therefore the correct answer is $730,000.