PROBLEM 6-3. Allocated Cost and Opportunity Cost [LO 2] Binder Manufacturing produces small electric motors used by appliance manufacturers.In the past year,the company has experienced severe excess capacity due to competition from a foreign company that has entered Binders market.The company is currently bidding on a potential order from Dacon Appliances for 6,000 Model 350 motors.The estimated cost of each motor is $45,as follows:

Direct material $25

Direct labor 5

Overhead 15

Total $45

The predetermined overhead rate is $3 per direct labor dollar.This was estimated by dividing estimated annual overhead ($15,000,000) by estimated annual direct labor ($5,000,000).The $15,000,000 of overhead is composed of $6,000,000 of variable costs and $9,000,000 of xed costs. The largest xed cost relates to depreciation of plant and equipment.

Required

a. With respect to overhead,what is the opportunity cost of producing a Model 350 motor?

b. Suppose Binder can win the Dacon business by bidding a price of $39 per motor (but no higher price will result in a winning bid).Should Binder bid $39?

c. Discuss how an allocation of overhead based on opportunity cost would facilitate an appropriate bidding decision.