Haverhill Electronics (HE) has offered to supply the county government with one model of its security screening device at “cost plus 20 percent.” HE operates a manufacturing plant that can produce 22,000 devices per year, but it normally produces 20,000. The costs to produce 20,000 devices follow.

Based on these data, company management expects to receive $348 (= $290 × 120 percent) per device for those sold on this contract. After completing 200 devices, the company sent a bill (invoice) to the government for $69,600 (= 200 devices × $348 per device).

The president of the company received a call from a county auditor, who stated that the per device cost should be as follows.

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

Required

What price would you recommend? Why? 

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Production costs: Materials.. Labor............ Supplies and other costs that will vary with production. Indirect cost that will not vary with production. Variable marketing costs....... Administrative costs (will not vary with production). Totals........... Total Cost $ 1,000,000 2,000,000 600,000 600,000 400,000 1,200,000 $5,800,000 Cost per Device $ 50 100 30 30 20 60 $290