Problem 6-4. Allocated Cost and Opportunity Cost

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PROBLEM 6-4. Allocated Cost and Opportunity Cost [LO 1] Brennen produces a mint syrup used by gum and candy companies. Recently, the company has had excess capacity due to a for- eign supplier entering its market. Brennen is currently bidding on a potential order from Qualit Candy for 5,000 cases of syrup. The estimated cost of each case is $23, as follows: Direct material Direct labor Overhead $ 9 Total $23 The predetermined overhead rate is $1.80 per direct labor dollar. This was estimated by di- viding estimated annual overhead ($1,080,000) by estimated annual direct labor ($600,000). The $1,080,000 of overhead is composed of $270,000 of variable costs and $810,000 of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. REQUIRED a. With respect to overhead, what is the opportunity cost of producing a case of syrup? b. Suppose Brennen can win the Quality Candy business by bidding a price of $19 per case (but no higher price will result in a winning bid). Should Brennen bid $19? c. Discuss how an allocation of overhead based on opportunity cost would facilitate an appropriate bidding decision