Brennen Co. produces a mint syrup used by gum and candy companies. Recently, the company has had

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Brennen Co. produces a mint syrup used by gum and candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Brennen is currently bidding on a potential order from Quality Candy for 5,000 cases of syrup. The estimated cost of each case is $23, as follows:

Direct material ..................... $ 9

Direct labor ............................ 5

Overhead .............................. 9

Total ................................. $23

The predetermined overhead rate is $1.80 per direct labor dollar. This was estimated by dividing estimated annual overhead ($1,080,000) by estimated annual direct labor ($600,000). The $1,080,000 of overhead is composed of $270,000 of variable costs and $810,000 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 case of syrup?

b. Suppose Brennen can win the Quality Candy business by bidding a price of $19 per case (but no higher price will result in a winning bid). Should Brennen bid $19?

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

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...
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