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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?

Sagot :

Tundexi

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

anthougo

1. The relevant cost per unit for Grant Industries is $7.00 ($123,000 + $164,000)/41,000 or ($184,500 + $246,000)/61,500.

2. The total opportunity cost of accepting the special order when the company lost sales of 6,500 units from its regular customers is $12,500.

What are the relevant costs and opportunity costs?

The relevant costs describe the avoidable costs that could be stopped if a decision is taken.

For example, if Grant Industries decides to take the special order, the relevant decision-making cost is $7 per unit and not $14 per unit.

The opportunity costs are costs that are not incurred based on taking an alternative decision.  It also describes the lost revenue when some sales are lost for the special order.

For example, the total opportunity costs incurred by Grant Industries for taking the special order instead of attending to the regular customers with 6,500 units demand is $12,500.

Data and Calculations:

Special order = 20,500 units

Current production = 41,000 units

Current operational capacity = 50%

Total capacity = 82,000 (41,000/50%)

Bid price = $13 per unit

New production based on special order = 61,500 (41,000 + 20,500)

Production Data                   Per  Unit         Per Bid

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

Question 2 Completion:

Assume the above facts plus a normal selling price of $24 per unit."

The opportunity cost of lost sales:

Lost sales units = 6,500

Contribution per unit = $17 ($24 - $7)

Total contribution margin = $110,500 ($6,500 x $17)

Contribution margin from special order = $123,000 ($13 - $7 x 20,500)

Thus, the opportunity cost of lost sales is $12,500 ($123,000 - $110,500).

Learn more about relevant and opportunity costs at https://brainly.com/question/14184614 and https://brainly.com/question/8846809

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