Question: Douglas Company has been asked to submit a bid on supplying gas masks to the Pentagon. The companys current cost structure per mask is as

Douglas Company has been asked to submit a bid on supplying gas masks to the Pentagon. The company’s current cost structure per mask is as follows:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Variable manufacturing overhead . . . . . . . . . . . . . . . . . . 7

Variable sales commissions . . . . . . . . . . . . . . . . . . . . . . 6

a. Assume that there would be no variable sales commission on this special order. Determine the lowest unit price that Douglas can bid without reducing its current level of operating income.

b. Assume the company desires a 36 percent contribution margin ratio from this sale and that a special sales commission of 4 percent of the bid price will be applied to the order instead of its normal $6 variable sales commission. Determine the bid price per unit given these unique circumstances.

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