PROBLEM 6-4. Allocated Cost and Opportunity Cost [LO 2] Brennen Co. produces a mint syrup used by gum and candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Brennen is currently bidding on a potential order from Quality Candy for 5,000 cases of syrup.

The estimated cost of each case is $23, as follows:

Direct Materials $9

Direct Labor $5

Overhead $9 Total $23

The predetermined overhead rate is $1.80 per direct labor dollar. This was estimated by dividing 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

1. With respect to overhead, what is the opportunity cost of producing a case of syrup?

2. 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?

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