Southern Tier Heating, Inc., installs heating systems in new homes built in the southern tier counties of New York state. Jobs are priced using the time and materials method. The president of Southern Tier Heating, B. T. Ewing, is pricing a job involving the heating systems for six houses to be built by a local developer. Ewing has made the following estimates.

*Direct machine costs consist of items such as special lubricants, replacement of needles used in stitching, and maintenance costs. These costs are not included in the normal overhead rates.
†Omaha Synthetic Fibers recently developed a new blanket fiber at a cost of $750,000. In an effort to recover this cost, management has instituted a policy of adding a $.50 fee to the cost of each blanket using the new fiber. To date, the company has recovered $125,000. Lightner knows that this fee does not fit within the definition of full cost as it is not a cost of manufacturing the product.

Required:
1. Calculate the minimum price per blanket that Omaha Synthetic Fibers Inc. could bid without reducing the company’s net income.
2. Using the full cost criteria and the maximum allowable return specified, calculate Omaha Synthetic Fibers Inc.’s bid price per blanket.
3. Independent of your answer to requirement 2, assume that the price per blanket that Omaha Synthetic Fibers Inc. calculated using the cost-plus criteria specified is greater than the maximum bid of $25 per blanket allowed. Discuss the factors that management should consider before deciding whether to submit a bid at the maximum acceptable price of $25 per blanket.

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Direct material Direct labor Direct machine costs* Variable overhead Fixed overhead....... Incremental administrative costs Special fee¹. Material usage Production rate $1.50 per pound of fibers $7.00 per hour $10.00 per blanket $3.00 per direct-labor hour $8.00 per direct-labor hour $2,500 per 1,000 blankets $.50 per blanket 6 pounds per blanket 4 blankets per direct-labor hour