Imperial Devices (ID) has offered to supply the state government with one model of its security screening device at "cost plus 20 percent." ID operates a manufacturing plant that can produce 66,000 devices per year, but it normally produces 60,000. The costs to produce 60,000 devices follow:

Based on these data, company management expects to receive $522 (= $435 × 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $261,000 (= 500 monitors × $522 per monitor).
The president of the company received a call from a state auditor, who stated that the per monitor cost should be:
Materials........................................................................................... $ 75
Labor................................................................................................ 150
Supplies and other costs that will vary with production................... 45
$270
Therefore, the price per monitor should be $324 (= $270 × 120 percent). The state government ignored marketing costs because the contract bypassed the usual selling channels.
Required
What price would you recommend? Why?

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Total Cost Device Production costs: s 4,500,000 75 9,000,000 150 45 45 30 90 $26,100,000 $435 Materials Labor Supplies and other costs that will vary with production. 2,700,000 2,700,000 1,800,000 .5,400,000 Variable marketing costs. Administrative costs (will not vary with production) Totals