Haversham Machine Works is bidding on a contract with the government of Bezaire. The contract is a cost-plus situation, with an add-on profit margin of 50 percent. Direct material and direct labor are expected to total $15 per unit. Variable overhead is estimated at $4 per unit. Total fixed overhead to produce the 50,000 units needed by the government is $1,400,000. By acquiring the machinery and supervisory support needed to produce the 50,000 units, Hav¬ ersham will obtain the actual capacity to produce 80,000 units,

a. Should the price bid by Haversham include a fixed overhead cost of $28 per unit or $17.50? How were these two amounts determined? Which of these two amounts would be more likely to cause Haversham to obtain the con¬ tract? Why?

b. Assume that Haversham set a bid price of $54.75 and obtained the contract. After producing the units, Haversham submitted an invoice to the govern¬ ment of Bezaire for $3,525,000. The minister of finance for the country requests an explanation. Can you provide one?

c. Haversham uses the excess capacity to produce an additional 30,000 units while making the units for Bezaire. These units are sold to another buyer. Is it ethical to present a $3,525,000 bill to Bezaire? Discuss.

d. Haversham does not use the excess capacity while making the units for Be¬ zaire. However, several months after that contract was completed, the com¬ pany begins production of additional units. Was it ethical to present a $3,525,000 bill to Bezaire? Discuss.

e. Haversham does not use the excess capacity because no other buyer exists for units of this type. Was it ethical to make a bid based on a fixed overhead rate per unit of $54.75? Discuss.LO1