Portable Power Company expects to operate at 80% of productive capacity during July

Portable Power Company expects to operate at 80% of productive capacity during July. The total manufacturing costs for July for the production of 25,000 batteries are budgeted as follows:

Direct materials                $162,500
Direct labor                      70,000
Variable factory overhead         30,000
Fixed factory overhead           112,500
Total manufacturing costs       $375,000

The company has an opportunity to submit a bid for 2,500 batteries to be delivered by July 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during July or increase the selling or administrative expenses. What is the unit cost below which Portable Power Company should not go in bidding on the government contract?


Answer:
Total costs………………………………………………………………………………… $375,000
Less fixed costs…………………………………………………………………………   112,500
Total variable costs………………………………………………………………………  $262,500

Variable cost per unit:
$262,500 ÷ 25,000 batteries = $10.50

The lowest bid should be sufficient to cover the variable cost of $10.50 per unit.