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
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.
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.