(Product costing and pricing) Chaney Tool Company is bidding on a contract with the government of Manatuka. The cost-plus contract includes an add-on markup of 50 percent of production cost. 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 gov¬ ernment is $1,400,000. By acquiring the machinery and supervisory support needed to produce the 50,000 units, Chaney Tool will obtain the actual ca¬ pacity to produce 80,000 units.

a. Should the price bid by Chaney Tool 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 Chaney Tool to obtain the contract? Why?

b. Assume that Chaney Tool set a bid price of $54.75 per unit and ob¬ tained the contract. After producing the units, the firm submitted an in¬ voice to the government of Manatuka for $3,525,000. Manatuka’s minister of finance requests an explanation. Can you provide one?

c. Chaney Tool uses the excess capacity to produce an additional 30,000 units while making the units for Manatuka. It sold these units to another buyer. Is it ethical to present a $3,525,000 bill to Manatuka? Discuss.

d. Chaney Tool does not use the excess capacity while making the units for Manatuka. However, several months after it completed that contract, the company begins production of additional units. Was it ethical to pre¬ sent a $3,525,000 bill to Manatuka? Discuss.

e. Chaney Tool 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.