Problem (Note that this is a problem using RELEVANT costs)

Sutter Company can produce two products, Blenders and Electric Mixers. The company has assembled the cost data per unit pertaining to the two products:

Blender Electric Mixer

Selling price $20.00 $21.00

Direct materials ($2 per pound) cost 4.00 8.00

Direct labor ($6.00 per hour) cost 6.00 3.00

Variable manufacturing overhead cost 2.00 1.00

Fixed manufacturing overhead cost 1.60 0.80

Variable selling and administrative expenses 1.00 5.00

Fixed selling and administrative expense 2.40 1.50

Assume that the regular demand is limited to 40,000 units of blenders and 50,000 units of electric mixers.

Variable and fixed (unavoidable) manufacturing overhead cost driver rates were established on the basis of available capacity of 100,000 direct labor hours per year (these rates are $2.00 and $1.60 per direct labor hour, respectively). Similarly, the unavoidable fixed selling and administrative costs were averaged over normal capacity for allocation purposes. The nature of the two products is such that the variable selling and administrative cost is different for the two products.

The company has an opportunity to bid on a government contract that, if won, would be completed in the coming year. The contract is for a specialized product that requires the same technology as Blenders and Electric Mixers. The job would require the following resources:

Direct materials 10,000 pounds

Direct labor 50,000 hours

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 $40,000 annually. This project would require half of her time. The experienced supervisor would be released from half of her regular duties and these would be covered by a second-line supervisor who is already working in another department of the company and who earns a salary of $30,000 annually. The second-line supervisor would need to devote two-thirds of his time to cover the experienced supervisors former duties. A new supervisor, at $12,000 annually, needs to be hired to cover the released duties of the second-line supervisor.

Special tools, costing $12,000, would be needed. These tools normally have a life of two years. It is unlikely that there would be any future need for the tools, and they could be sold for $1,000 after the contract is finished. Assume that there are no selling and administrative costs for this special order.

REQUIRED

1. Compute the total contribution margin before the government bid

2. Determine the minimum bid price for the government job that would leave the companys total profits unaffected

3. Assume that there are no constraints on DL time. Does this change your answer to (2)? If so, whats the new bid price?

4. Refer to the original data. Assume that the government contract offers a total price of $500,000 for this special job. Assume that workers can work overtime to overcome labor capacity constraints. Would you accept the offer? What is the maximum overtime premium per hour (i.e. on top of regular pay) that you would be willing to pay?