A. This answer is incorrect. See the correct answer for a complete explanation.

B. This answer is incorrect. See the correct answer for a complete explanation.

C. In order to determine the minimum bid, we need to calculate the costs that will be incurred only if the additional 40 engines will be produced. This will include materials of $240,000 (equal to the cost of materials for the 40 units already produced) plus the costs of the labor and variable overhead. We will not include fixed overhead that is allocated to the engines because this overhead would be incurred even if the engines are not produced.

To determine the cost of the labor for the next 40 units, we first need to find the learning curve percentage that applies. The first 10 units cost $120,000 in labor. If no learning had taken place, then units 11 through 20 would have also cost $120,000, and the total cumulative labor cost for the first 20 units would have been $240,000. However, the cumulative labor cost for the first 20 units was $192,000. Under the Cumulative Average-Time Learning Model, the formula to find the learning curve would be $120,000 × (2 × X) = $192,000, where X = the learning curve. Solving for X, we get $240,000X = $192,000, and X = .80. We can do the same thing for units 21 through 40: $192,000 × (2 × X) = $307,200. $384,000X = $307,200, and X = .80. So we know the learning curve is 80%.

Therefore, we can calculate the cost of the labor to produce the next 40 engines as follows: $307,300 × (2 × .80) = X, where X = the cumulative cost of labor for all 80 units produced. Solving for X, we get X = $491,520. From this, we can calculate the labor cost to produce units 41 through 80. It will be $491,520 minus $307,200 (the cost to produce the first 40 engines), or $184,320. Variable overhead will also be charged at $1 per direct labor dollar, so that will also be $184,320. The variable costs of production are therefore $608,640 ($240,000 + $184,320 + $184,320).

D. This answer includes the fixed costs as an incremental cost that would be incurred only if the production of the additional 40 engines took place. See the correct answer for a complete explanation.