Box Elder Power Company expects to operate at 85% of productive capacity during May. The total manufacturing costs for May for the production of 40,000 batteries are budgeted as follows:
Direct materials $240,000
Direct labor 100,000
Variable factory overhead 32,000
Fixed factory overhead 150,000
Total manufacturing costs $522,000
The company has an opportunity to submit a bid for 5,000 batteries to be delivered by May 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal operation during May or increase the selling or administrative expenses.
Required:
1. What is the unit cost below which Box Elder Power Company should not go in bidding on the government contract?

The company should not go below $9.30 in bidding on the government contract.

Explanation:

Given:

Direct materials = $240,000

Direct labor = 100,000

Variable factory overhead = 32,000

Fixed factory overhead = 150,000

Total manufacturing costs = $522,000

Direct Material p.u = $240,000 ÷ 40,000 = $6

Direct Labor p.u = $100,000 ÷ 40,000 = $2.5

Variable Factory overhead p.u = $32,000 ÷ 40,000 = $0.8

Total overhead = Direct Material p.u +  Direct Labor p.u +  Variable Factory overhead p.u

= $6 + $2.5 + $0.8

Thus total overhead = $9.3

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