Problem 1-39 (Static) Cost Data for Managerial Purposes (LO1-3)
Imperial Devices (ID) has offered to supply the state governmentwith one model of its security screening device at “cost plus 20percent.†ID operates a manufacturing plant that can produce 66,000devices per year, but it normally produces 60,000. The costs toproduce 60,000 devices follow:
| Total Cost | | Cost per
Device | |
| Production costs: | | | | | | | | |
| Materials | $ | 4,500,000 | | | $ | 75 | |
| Labor | | 9,000,000 | | | | 150 | | |
| Supplies and other costs that will vary with production | | 2,700,000 | | | | 45 | | |
| Indirect cost that will not vary with production | | 2,700,000 | | | | 45 | | |
| Variable marketing costs | | 1,800,000 | | | | 30 | | |
| Administrative costs (will not vary with production) | | 5,400,000 | | | | 90 | | |
| Totals | $ | 26,100,000 | | | $ | 435 | | |
|
Based on these data, company management expects to receive $522(= $435 × 120 percent) per monitor for those sold on this contract.After completing 500 monitors, the company sent a bill (invoice) tothe government for $261,000 (= 500 monitors × $522 permonitor).
The president of the company received a call from a stateauditor, who stated that the per monitor cost should be:
| |
| Materials | $ | 75 | |
| Labor | | 150 | |
| Supplies and other costs that will vary with production | | 45 | |
| $ | 270 | |
|
Therefore, the price per monitor should be $324 (= $270 × 120percent). The state government ignored marketing costs because thecontract bypassed the usual selling channels.
Required:
For each of the four situations, calculate the cost basis perdevice based on the information shown above. (Roundintermediate calculations and final answers to 2 decimalplaces.)
Options:
- Only the differential production costs could be considered asthe cost basis.
- The total cost per device for normal production of 60,000devices could be used as the cost basis.
- The total cost per device for production of 66,000 devices,excluding marketing costs, could be used as the cost basis.
- The total cost per device for production of 66,000 devices,including marketing costs, could be used as the cost basis.
| Per Device Cost Basis | Recommended Price Per Device |
| Option A | | |
| Option B | | |
| Option C | | |
| Option D | | |
