Alameda Instruments (AI) has offered to supply the Air Force with computer monitors at cost plus 20

Alameda Instruments (AI) has offered to supply the Air Force with computer monitors at “cost plus 20 percent.” AI operates a manufacturing plant that can produce 44,000 monitors per year, but it normally produces 40,000. The costs to produce 40,000 monitors follow:

Based on these data, company management expects to receive $174 (= $145 × 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $87,000 (= 500 monitors × $174 per monitor). The president of the company received a call from an Air Force auditor, who stated that the per monitor cost should be:
Materials......................................................................................... $25
Labor............................................................................................... 50
Supplies and other costs that will vary with production................. 15
$90
Therefore, the price per monitor should be $108 (= $90 × 120 percent). The Air Force ignored marketing costs because the contract bypassed the usual selling channels.

Required
What price would you recommend?Why?

Transcribed Image Text:

Cost per Total Cost Monitor Production costs: $1,000,000 $25 Materials.. Labor Supplies and other costs that will vary with production Indirect cost that will not vary with production 2,000,000 50 600.000 15 600,000 15 400,000 10 1200,000 30 $5,800,000 $145 Variable marketing costs Administrative costs (will not vary with production).... Totals