Imperial Devices (ID) has offered to supply the state government with a model of its security detection device at "cost plus 20 percent." ID operates a manufacturing facility that can produce 22,000 devices per year, but typically produces 20,000. The costs to produce 20,000 devices are as follows:

	Total cost			Cost per Device
Production costs:
Materials	ps	1,380,000		ps	69.00
Manpower of labour		1,920,000			96.00
Supplies and other costs that will vary with production		740.000			37.00
Indirect cost that will not vary with production.		640.000			32.00
Variable Marketing Costs		1,700,000			85.00
Administrative costs (will not vary with production)		1,280,000			64.00
Totals	ps	7,660,000		ps	383.00

Based on these data, company management expects to receive $459.60 (= $383.00 × 120 percent) per monitor for those sold under this contract. After completing 2,000 monitors, the company sent an invoice (invoice) to the government for $919,200 (= 2,000 monitors × $459.60 per monitor).

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

Materials	ps	69.00
Manpower of labour		96.00
Supplies and other costs that will vary with production		37.00
	ps	202.00

Therefore, the price per monitor should be $242.40 (= $202.00 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual sales 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 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 the production of 22,000 devices, excluding marketing costs, could be used as the cost basis.

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

Answer rating: 100% (QA)

SOLUTION Lets calculate the cost basis per device for each of the four situations A Only differential production costs could be considered as the cost ... View the full answer