Calculate the bid on a Special Order using two methods

Lyan needs the custom-designed equipment to increase its bottle-making capacity so that it will not have to buy bottles from an outsider supplier. Lyan company
Requires 5,000,000 bottles annually. Its prsent equipment has a maximum capacity of 4,500,000 bottles with a directly traceable cash outlay cost of 18 cents
per bottle. Thus, Lyan has had to purchase 500,000 bottles annuallly. Its present equipment has a maximum capacity of 4,500,000 bottles with a directly traceable
cash outlay each. The new equipment would allow Lyan to manufacture its entire annual demand for bottles at a direct-material cost savings of 1.2 cents per bottle. Bair
estimates that Lyan's annual bottle demand will continue to be 5,000,000 bottles over the next five years, the estimated life of the special-purpose equipment.

Required: Bair Company's management plans to submit a bid to Lyan Company for the manufacture of the special-purpose bottling equipment.

1. Calculate the bid Bair would submit if it follows its standard pricing policy for special-purpose equipment.

Standard pricing policy for special-purpose equipment is a 50% markup on absorption manufacturing cost.
Bid = (Absorption manufacturing cost) + (Markup x Absorption manufacturing cost)

Markup 50%

Manufacturing costs per unit:
Direct material $307,200
Direct labor 198,000
Manufacturing overhead (11,000hrs*$10.80/hr) 118,800
Total absorption cost per unit $624,000

Bid = $936,000

2. Calculate the minimum bid Bair would be willing to submit on the Lyan equipment that would result in the same total contribution margin as planned for the first
quarter of 20x1.

Unit needs 11,000 hrs to produce in one quarter or 3 months. Plant can run 15,000 hours per month and currently runs 12,000 hours per month. In 3 months this leaves
available to work on the item bidding on. 2,000 hours will have to be cut from the production of the current products to complete the project. Each unit takes 250 hrs, so this will result
in a loss of production of 8 units.

Sales revenue (8*14,400) 115,200
Less: variable expenses
Variable manufacturing costs (18+10.80)*2000 57,600
Contribution margin 57,600

Now calculate what the sales revenue needs to be on the bidded unit to keep the contribution margin the same.

Sales revenue - variable expenses = contribution margin
Sales revenue = contribution margin + variable expenses
= 57,600 + (11,000 * 28.80)
= $374,400

3. Suppose Bair has submitted a bid slightly above the minimum calculated in requirement (2). Upon receiving Bair's bid, Lyan's assistant purchasing manager
telephoned his friend at Tygar Corporation: "Hey Joe, we just got a bid from Bair on some customized equipment. I think Tygar would stand a good chance of
beating it. Stop by the house this evening, and I'll show you the details of Bair's bid and the specifications on the machine."

Is Lyan Company's assistant purchasing manager acting ethically? Explain

I called this unethically. Bair's raised bid was its objective to create more profit and Bair felt that the company could make good profit after careful research on
how they can win the bid successfully. It is common practice the employees do not leak any information out of the company until they are give a permission to
share the information. The Lyan Company's assistant purchasing manager was wrong for sharing the bid information. The assistant purchasing manager
is making the bidding competition unfair. The assistant purchasing manager just gave the Tygar an inside information on how Tygar can restructure their
bid so that they can win the bid competition.