Reference no: EM13355974

Decision on proposal where contract price is lesser than variable cost

Generators, Inc. produced emergency backup generators for use in large commercial buildings. The costs of manufacturing and marketing the generators at the company's normal volume of 3,000 units per month are shown.

Costs per Unit for Generators

Unit Manufacturing costs:
Variable Materials	$1,000
Variable Labor	1,500
Variable Overhead	500
Fixed Overhead	1,200
Total Manufacturing Cost		$4,200
Unit Marketing Costs:
Variable	500
Fixed	1,400
Total Marketing Cost		1,900
Total Unit Cost:		$6,100

The following questions refer only to the data given above. Unless otherwise stated, assume there is no connection between situations described in each of the questions, each is to be treated independently. Unless otherwise stated, a regular selling price of $7,400 per unit should be assumed.

Assume the same facts as in Question 6 except that the idle facilities would be used to produce 800 modified generators per month for use in martime service. These modified units could be sold for $9,000 each, while costs of manufacturing would be $5,500 per unit for variable manufacturing expense. Variable marketing costs would be $1,000 per unit. Fixed marketing and manufacturing costs would remain unchanged. What is the maximum purchase price per unit that Redi-Watt should be willing to pay to the outside contractor? Should the proposal be accepted for a price of $4,250 per unit to the contractor?