Solutions Guide:
Marcus Fibers, Inc, specializes in the manufactore of synthetic fibers that the company uses in many products such as blankets, coats, and uniforms for police and firefighters. Marcus has been in business since 1975 and has been profitable each year since 1983. The company uses a standard cost system and applies manufacturing support costs on the basis of direct labor hours. Marcus has recently received a request to bid on the manufacturing of 800,000 blankets scheduled for delivery to several military bases. The bid must be stated at full cost per unit plus a return on full cost of no more than 9% after income taxes. Full cost has been defined as including all variable costs, and reasonable incremental admininstrative costs associated with the manufacturing that bids in excess of $25 per blanket are not likely to be considered.
To prepare the bid the 800,000 blankets, Andrea, cost accountant has gathered information about the costs associated with the production of the blanket.
Costs Amount
Raw Materials $1.50 per pound of fibres
Direct Labor $7.00 per hour
Direct Machine Costs $10.00 per blanket
Variable Support $3.00 per direct labor hour
Fixed Support $8.00 per direct labor hour
Incremental Admin Costs $2,500 per 1,000 blankets
Special Fee $0.50 per blanket
Material Usage 6 pounds per blanket
Production Rate 4 blankets per direct labor hour
Effective Tax Rate 40%
Required:
a. Calcualte the minimum price per blanket that Marcus Fibers, Inc, could bid without reducing the company's net income.
b. Using the full cost criterion and the maximum allowable return specified, calculate the bid price blanket for Marcus Fibers, Inc.
c. Without prejudice to your answer to (b), assume that the price per blanket to Marcus Fibers, Inc, calculated using the cost-plus criterion specified, is greater than the maximum bid of $25 per blanket allowed. Discuss the factors that Marcus Fiber, Inc, should consider before deciding whether to submit a bid at the maximum acceptable price of $25 per blanket.
(a)The minimum price per blanket that Marcus Fibers, Inc. could bid without reducing the company’s net income is $24.00 calculated as follows:
Raw materials (6 lb. × $1.50/lb.) / $9.00Direct labor (0.25 hr. × $7.00/hr.) / 1.75
Machine time ($10.00/blanket) / 10.00
Variable support (0.25 hr × $3.00/hr.) / 0.75
Administrative cost ($2,500 1,000) / 2.50
Minimum bid price / $24.00
(b)Using the full cost criterion and the maximum allowable return specified, Marcus Fibers, Inc.’s bid price per blanket would be $29.90, calculated as follows:
Relevant costs from requirement (a) / $24.00Fixed support (0.25 hr × $8.00/hr.) / 2.00
Subtotal / 26.00
Allowable return (0.15a × $26.00) / 3.90
Bid price / $29.90
a 9% (1 – tax rate of 40%)
(b)Factors that Marcus Fibers, Inc. should consider before deciding whether to submit a bid at the maximum acceptable price of $25.00 per blanket include the following:
•The company should be sure there is sufficient excess capacity to fulfill the order and that no additional investment is necessary in facilities or equipment, which would increase the capacity-related (fixed) expense.
•If the order is accepted at $25.00 per blanket, there will be a $1.00 contribution per blanket to fixed costs. However, the company should consider whether there are other jobs that would make a greater contribution.
•Acceptance of the order at a low price could cause problems with current customers who might demand a similar pricing arrangement.