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Question: imperial devices id has offered to supply the state government...

Question details

Imperial Devices (ID) has offered to supply the state government with one model of its security screening device at "cost plus 20 percent." ID operates a manufacturing plant that can produce 22,000 devices per year, but it normally produces 20,000. The costs to produce 20,000 devices follow:

Total Cost Cost per
Device
Production costs:
Materials $ 1,140,000 $ 57.00
Labor 1,760,000 88.00
Supplies and other costs that will vary with production 820,000 41.00
Indirect cost that will not vary with production 640,000 32.00
Variable marketing costs 1,740,000 87.00
Administrative costs (will not vary with production) 1,060,000 53.00
Totals $ 7,160,000 $ 358.00

Based on these data, company management expects to receive $429.60 (= $358.00 × 120 percent) per monitor for those sold on this contract. After completing 2,000 monitors, the company sent a bill (invoice) to the government for $859,200 (= 2,000 monitors × $429.60 per monitor).

The president of the company received a call from a state auditor, who stated that the per monitor cost should be:

Materials $ 57.00
Labor 88.00
Supplies and other costs that will vary with production 41.00
$ 186.00

Therefore, the price per monitor should be $223.20 (= $186.00 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual selling channels.

Required:

For each of the four situations, calculate the cost basis per device based on the information shown above. What price would you recommend? (Round intermediate calculations and final answers to 2 decimal places.)

Options:

A. Only the differential production costs could be considered as the cost basis.

B. The total cost per device for normal production of 20,000 devices could be used as the cost basis.

C. The total cost per device for production of 22,000 devices, excluding marketing costs, could be used as the cost basis.

D. The total cost per device for production of 22,000 devices, including marketing costs, could be used as the cost basis.

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