The Tassie Company estimates that next year it will manufacture and sell 150000 units of its product. On the basis of that level of activity, it has budgeted for the following costs and prices per unit:
Direct Material Cost $2.50
Direct Labour Cost 3.00
Variable Factory Overhead 1.50
Fixed Factory Overhead 2.00
Manufacturing Cost 9.00
Variable Selling and Administrative Cost 2.00
Fixed Selling and Administrative Cost 1.50
Total Cost 12.50
20% Mark-up 2.50
Selling Price $15.00
The Company has an opportunity to bid for the supply of an additional 40000 units of its product to a government department. No sales commission (variable selling and admin. cost) is involved and no additional fixed costs will be incurred.
Give a reasoned opinion on the level of the bid that should be made in each of the following two circumstances:
(i) The capacity of the Tassie Company’s factory is 200000 units per year.
(ii) The capacity of the factory is only 180000 units per year.
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