Bid Pricing; Review of CVP Analysis Deaton Fibers Inc. specializes in the manufacture of syn- thetic fibers that the company uses in many products such as blankets, coats, and uniforms for police and firefighters. Deaton has been in business since 1975 and has been profitable each year since 1983.
Deaton recently received a request to bid on the manufacture 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 12 percent after income taxes. Full cost has been defined as all variable costs of manufacturing the product, a reasonable amount of fixed overhead, and a reasonable incremental administrative cost associated with the manufacture and sale of the product. The contractor has indi- cated that bids in excess of $30 per blanket are not likely to be considered.
To prepare the bid for the 800,000 blankets, John Taylor, cost management analyst, has gathered the following information concerning the costs associated with the production of the blankets. The fixed overhead costs represent an allocation of the cost of currently used facilities. No new fixed costs are needed for the order.
Raw material per pound of fibers
Direct labor per hour
Direct machine costs per blanket*
Variable overhead per direct labor-hour
Fixed overhead per direct labor-hour
Added administrative costs per 1,000 blankets
Special fee per blanket †
6 pounds per blanket
4 blankets per labor-hour
Effective tax rate
* Direct machine costs consist of variable costs such as special lubricants, replacement needles used in stitching, and maintenance costs that are not included in the normal overhead rates.
† Deaton recently developed a new blanket fiber at a cost of $750,000. To recover this cost, it adds a $0.50 fee to
the cost of each blanket using the new fiber. To date, the company has recovered $125,000. John knows that this fee does not fit within the definition of full cost because it is not a cost to manufacture the product.
What is the breakeven price per blanket using Deaton’s full cost system?
Calculate the minimum price per blanket that Deaton could bid without reducing the company’s net income.
Using the full cost criteria and the maximum allowable return specified, calculate the bid price per blan- ket for Deaton Fibers.
Without prejudice to your answer to requirement 3, assume that the price per blanket that Deaton calcu- lated using the cost-plus criteria specified is higher than the maximum allowed bid of $30 per blanket. Discuss the strategic factors that the company should consider before deciding whether to submit a bid at the maximum acceptable price of $30 per blanket.