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Answer (D) is correct . The company will need to cover its variable costs and any other incremental costs. Thus, direct materials ($200,000), direct labor ($150,000), the supervisor’s salary ($20,000), and fringe benefits on direct labor ($15,000) are the incremental unit costs of manufacturing the engines. The breakeven price is therefore $385,000 ($200,000 + $150,000 + $20,000 + $15,000).

Answer (A) is incorrect because Depreciation and rent are allocated costs that will be incurred even if the contract is lost.
Answer (B) is incorrect because The supervisor’s salary will have to be covered. The $20,000 salary is an avoidable cost.
Answer (C) is incorrect because Depreciation is a cost that cannot be avoided.