NEW JERSEY CORPORATION

The NEW JERSEY Corporation can produce two products, X-1 and X-2. Using the selling prices, the standard full absorption cost figures and some estimated selling and administrative costs, the following per unit figures have been estimated:

The variable fixed manufacturing overhead rates were established on the basis of practical capacity of 100,000 direct-labor hours per year. Overhead is applied on the basis of direct-labor hours. These rates are $2.00/hr (variable overhead) and $1.60/hr (fixed overhead). Likewise, the fixed selling and administrative costs were utilized over the practical capacity. The nature of the two products is such that the variable selling and administrative costs have a different rate for the two products.

The corporation has an opportunity to bid on a government contract called X-3 which, if won, would be completed in the coming year. The contract is for a specialized product that requires some of the same technology as X-1 and X-2. The job would require the following resources:

Because of the special nature of this job, extra supervision would be needed. The actual supervision of the job would be done by an experienced supervisor who earns a salary of $20,000 annually. This project would require one-half of her time. The experienced supervisor would be released from one-half of her regular duties and these would be covered by a second-line supervisor earning $15,000 annually. Since the second-line supervisor would have learning involved, two-thirds of his time would be consumed in covering the experienced supervisors duties. A new supervisor, at a $19,000 annual salary, would have to be hired to cover the released work of the second-line supervisor. This new supervisor would have no other duties.

Special tools, costing $9,000 would be needed for X-3. These tools normally have a 2-year life. It is not likely that there would be any future need for the tools, and they could be sold for $1,000 after the contract is finished.

There are no incremental selling expenses in connection with the X-3 government project. Direct laborers would be laid off if not needed.

IGNORE TIME VALUE OF MONEY IN ALL CASES.

REQUIRED:

1. Assume that there is limited demand for the corporations existing products. Due to demand limitations, the company can only sell 50,000 units of X-1 annually and 30,000 units of X-2. Prepare an itemized and fully supported schedule showing the minimum bid that the corporation would have to submit on the government contract of X-3 in order for total profits to be unaffected. Is there an opportunity cost? Why or why not?

2. Now assume that there are no market constraints on either product and that the company can sell the entire product they can produce. Also assume that the firm will make optimal use of its available labor time. Note that the labor is the only constraint at 100,000 hours. What is the minimum bid the corporation would have to submit? Is there an opportunity cost? Why or why not?

3. Again assume as in 1) above that the market is limited to 50,000 units of X-1 and 30,000 units of X-2. Now assume that the government contract would require 40,000 labor hours. What is the minimum bid in this case? Is there an opportunity cost? Why or why not?

X-1 X-2 $21.00 $20.40 Selling price Direct materials (@ $2/lb) Direct labor (@ $6/hr) Variable manufacturing overhead Fixed manufacturing overhead Variable sellin expense Fixed selling/administrative exp. Net income $4.00 6.00 2.00 1.60 1.00 2.40 $6.00 2.40 0.80 0.64 5.00 0.96 15.80 17.00 $4.00 $4.60