Power Systems Inc If Production of This Engine Was Discontinued, the Production Capacity

Power Systems Inc. manufactures jet engines for the United States armed forces on a cost-plus basis. The production cost of a particular jet engine is shown below: $\begin{array}{lrr} \text {Direct materials. } &£200,000\\ \text {Direct labour. } &150,000&\\ \text { Manufacturing overhead: } &\\\ \text { Supervisor's salary.} &20,000\\ \text { Fringe benefits on direct labour} &15,000\\ \text { Depreciation} &12,000\\ \text { Depreciation } &\underline{11,000}\\ \text { Total cost} &\underline{£408,000}\end{array}$


If production of this engine was discontinued, the production capacity would be idle, and the supervisor would be laid off. The depreciation referred to above is for special equipment that would have no resale value and that does not wear out through use. When asked to bid on the next contract for this engine, the minimum unit price that Power Systems should bid is

A) £408,000.
B) £365,000.
C) £397,000.
D) £385,000.

Correct Answer:

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