Question

Imperial Devices (ID) has offered to supply the state government with one model of its security screening device at "cost plus 20 percent." ID operates a manufacturing plant that can produce 22,000 devices per year, but it normally produces 20,000. The costs to produce 20,000 devices follow:

	Total Cost			Cost per Device
Production costs:
Materials	$	1,220,000		$	61.00
Labor		1,920,000			96.00
Supplies and other costs that will vary with production		820,000			41.00
Indirect cost that will not vary with production		500,000			25.00
Variable marketing costs		1,660,000			83.00
Administrative costs (will not vary with production)		1,160,000			58.00
Totals	$	7,280,000		$	364.00

Based on these data, company management expects to receive $436.80 (= $364.00 × 120 percent) per monitor for those sold on this contract. After completing 2,000 monitors, the company sent a bill (invoice) to the government for $873,600 (= 2,000 monitors × $436.80 per monitor).

The president of the company received a call from a state auditor, who stated that the per monitor cost should be:

Materials	$	61.00
Labor		96.00
Supplies and other costs that will vary with production		41.00
	$	198.00

Therefore, the price per monitor should be $237.60 (= $198.00 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual selling channels.

Required:

For each of the four situations, calculate the cost basis per device based on the information shown above. What price would you recommend? (Round intermediate calculations and final answers to 2 decimal places.)

Options:

A. Only the differential production costs could be considered as the cost basis.

B. The total cost per device for normal production of 20,000 devices could be used as the cost basis.

C. The total cost per device for production of 22,000 devices, excluding marketing costs, could be used as the cost basis.

D. The total cost per device for production of 22,000 devices, including marketing costs, could be used as the cost basis?

Per Device Cost Basis Recommendend Price Per Device

Option A

Option B

OptionC

Option D

Answer 1

Solution A:

Cost basis per device if differential production costs could be considered as the cost basis:

Variable cost of production per unit = $61 + $96 + $41 = $198 per device.

Solution B:

Cost basis per device if total cost per device for normal production of 20,000 devices could be used as the cost basis:

Cost per unit at normal production of 20000 units = $364 per device

Solution C:

Cost basis per device if total cost per device for production of 22,000 devices, excluding marketing costs, could be used as the cost basis:

Computation of cost per device considering production of 22000 units
Particulars	Amount
Material (22000*$61)	$1,342,000.00
Labor (22000*$96)	$2,112,000.00
Supplies and other costs that will vary with production (22000*$41)	$902,000.00
Indirect cost that will not vary with production	$500,000.00
Administrative costs (will not vary with production)	$1,160,000.00
Total Cost	$6,016,000.00
Cost per device (Total cost / Nos of devices produced)	$273.45

Solution D:

Computation of cost per device considering production of 22000 units
Particulars	Amount
Material (22000*$61)	$1,342,000.00
Labor (22000*$96)	$2,112,000.00
Supplies and other costs that will vary with production (22000*$41)	$902,000.00
Indirect cost that will not vary with production	$500,000.00
Variable markerting cost (22000*$83)	$1,826,000.00
Administrative costs (will not vary with production)	$1,160,000.00
Total Cost	$7,842,000.00
Cost per device (Total cost / Nos of devices produced)	$356.45

Solution E:

Per devices cost basis recommended price per device will be option C in which total cost per device will be calculated for production of 22000 devices excluding marketing cost.

Therefore cost basis under option C = $273.45

Recommended price = $273.45 * 120% = $328.14