Graphic Components (GC) has offered to supply the Federal Aviation Agency (FAA) with computer monitors at "cost plus 20 percent." GC operates a manufacturing plant that can produce 22,000 monitors per year, but it normally produces 20,000. The costs to produce 20,000 monitors follow:

Based on these data, company management expects to receive $348 (= $290 × 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $174,000 (= 500 monitors × $348 per monitor). The president of the company received a call from an FAA representative, who stated that the per monitor cost should be

Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50

Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Supplies and other costs that will vary with production . . . .  . . 30

                                                                                                            $180

Therefore, the price per monitor should be $216 (= $180 × 120 percent). The FAA ignored marketing costs because the contract bypassed the usual selling channels.

Requirement:

What price would you recommend?Why? Discuss.

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Cost per Case Total Cost Production costs: Materials Labor Supplies and other costs that will vary with production Indirect cost that will not vary with production $1,000,000 S50 2,000,000 100 30 30 20 60 $6,800,000 $290 600,000 600,000 400,000 1,200,000 Variable marketing costs Administrative costs (all fixed) lotals.