Portable Power Company expects to operate at 80% of productive capacity during July. The total manufacturing costs for July for the production of 25,000 batteries are budgeted as follows: Direct materials $162,500
Direct labor 70,000
Variable factory overhead 30,000
Fixed factory overhead 112,500
Total manufacturing costs $375,000

The company has an opportunity to submit a bid for 2,500 batteries to be delivered by July 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during July or increase the selling or administrative expenses.

Required:
What is the unit cost below which Portable Power Company should not go in bidding on the government contract?

$10.5

Explanation:

Given the above inflation, we need to calculate direct material per unit, direct labor per unit and variable factory overhead per unit.

Direct material per unit = Total direct material ÷ Total manufacturing cost for July for the production of 25,000 batteries

= $162,500 ÷ 25,000

= $6.5

Direct labor per unit = Total direct labor ÷ Total manufacturing cost for July for the production of 25,000 batteries

= $70,000 ÷ 25,000

= $2.8

Variable factory overhead per unit = Total variable overhead ÷ Total manufacturing cost for July for the production of 25,000 batteries.

= $30,000 ÷ 25,000

= $1.2

Therefore, total overhead

= Direct material cost per unit + Variable cost per unit + Variable factory overhead cost per unit

= $6.5 + $2.8 + $1.2

= $10.5

The unit cost which portable power company should not go is $10.5

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