PROBLEM: Allocated Cost and Opportunity Cost. Binder Manufacturing produces small electric motors used by appliance manufacturers. In the past year, the company has experianced severe excess capacity due to competition from a forign company that has entered Binder's market. The company is currently bidding on a potential order from Dacon Appliances for 6,000 Model 350 motors. The estimated cost of each motor is $40, as follows:
The predetermined overhead rate is $3 per direct labor dollar. This was estimated by dividing estimated annual overhead ($15,000,000) by estimated annual direct labor ($5,000,000). The $15,000,000 of overhead is composed of $6,000,000 of variable cost and $9,000,000 of fixed cost. The largest fixed cost relates to depreciation of plant and equipment.
Required to do:
Q1. With respect to overhead, what is the opportunity cost of producing a Model 350 motor?
Q2. Suppose Binder can win the Dacon business by bidding a price of $37 per motor (but no higher price will result in a winning bid). Should Binder bid $37? Why or why not?
Q3. Discuss how an allocation of overhead based on opportunity cost would facilitate an appropriate bidding decision.