Mighty Mint Co. produces mint syrup used by gum and candy companies. Recently, the companies has had excess capacity due to a foreign supplier entering its market. Might Mint is currently bidding on a potential order from Quality Candy for 5,000 cases of syrup. The estimated cost of each case is $18, as follows:
Direct material $6
Direct labor $4
Overhead $8
Total $18
The predetermined overhead rate is $2 per direct labor dollar. This was estimate by dividing estimated annual overhead (1,000,000) by estimated annual direct labor ($500,000). The $1,000,000 of overhead is composed of $250,000 of variable costs and $750,000 of fixed costs. The largest fixed cost relates to depreciation of plant and equipment.
a. With respect to overhead, what is the opportunity cost of producing a case of syrup?
b. Suppose Mighty Mint can win the Quality Candy business by bidding a price of $16 per case (but no higher price will result in a winning bid). Should Mighty Mint bid $16?