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"Allocated Cost and Opportunity Cost" Binder Manufacturing produces small electric motors used by appliance manufacturers.

"Allocated Cost and Opportunity Cost"

Binder Manufacturing produces small electric motors used by appliance manufacturers. In the past year, the company has experienced severe excess capacity due to competition from a foreign company that has entered Binder's market. The company is currently bidding on a potential order from Dacon Appliances for 6,000 Model 350 motors. The estimated cost of each motor is $40, as follows:

Direct material
$20
Direct labor
5
Overhead
15
Total
$40

The predetermined overhead rate is $3 per direct labor dollar. This was estimated by dividing estimated annual overhead ($15,000,000) by estimated annual direct labor ($5,000,000). The $15,000,000 of overhead is composed of $6,000,000 of variable costs and $9,000,000 of fixed costs. The largest fixed cost relates to depreciation of plant and equipment.

Required


a.

With respect to overhead, what is the opportunity cost of producing a Model 350 motor?

b.

Suppose Binder can win the Dacon business by bidding a price of $37 per motor (but no higher price will result in a winning bid). Should Binder bid $37?

c. Discuss how an allocation of overhead based on opportunity cost would facilitate an appropriate bidding decision.
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