Justin Manufacturing, which produces electrical components, is contemplating submitting a bid for 30,000 units of Item No. 54. The bid’s cost will be follows:
Raw materials $ 75,000
Direct labor 120,000
Manufacturing overhead 150,000
Additional set-up costs 3,000
Special device 5,000
Allocated administrative overhead 12,000
Total cost $365,000
The special device will be purchased for this job and once the job is completed, the device will be discarded. Justin applies total manufacturing overhead of $5 to each unit (0.5 machine hours at $10 per hour). This figure is based, in part, on budgeted yearly fixed overhead of $1,440,000 and an anticipated volume of 480,000 machine hours (40,000 per month). Justin is presently working at 85% of capacity, and the client needs the order in two months.
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1. Is Justin’s current operating environment one of excess capacity or no excess capacity? Briefly explain.
2. If Justin had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the order?
3. Can Justin produce this order in the required time frame of two months? Explain.
4. Suppose that Justin is in marginal financial health. Explain the benefits and problems of approaching the bidding procedure with (1) a low bid or (2) a high bid.
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