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Calculating a Minimum Bid

Bair Company is a manufacturer of standard and custom-designed bottling equipment. Early in December 20x0 Lyan Company asked Bair to quote a price for a custom-designed bottling machine to be delivered in April. Lyan intends to make a decision on the purchase of such a machine by January 1, so Bair would have the entire first quarter of 20x1 to build the equipment. Bair's pricing policy for custom-designed equipment is 50 percent markup on absorption manufacturing cost. Lyan's specifications for the equipment have been reviewed by Bair's Engineering and Cost
Management departments, which made the following estimates for direct material and direct labor.

Direct material ................................................................................. $307,200
Direct labor (11,000 hours at $18) .............................................. 198,000

Manufacturing overhead is applied on the basis of direct-labor hours. Bair normally plans to run its plant at a level of 15,000 direct-labor hours per month and assigns overhead on the basis of 180,000 direct-labor hours per year. The overhead application rate for 20x1 of $10.80 per hour is based on the following budgeted manufacturing overhead costs for 20x1.
Variable manufacturing overhead .......................................................... $1,166,400
Fixed manufacturing overhead ............................................................. 777,600
Total manufacturing overhead ........................................................... $1,944,000

Bair's production schedule calls for 12,000 direct-labor hours per month during the first quarter. If Bair is awarded the contract for the Lyan equipment, production of one of its standard products would have to be reduced. This is necessary because production levels can only be increased to 15,000 direct labor hours each month on short notice. Furthermore, Bair's employees are unwilling to work overtime.
Sales of the standard product equal to the reduced production would be lost, but there would be no permanent loss of future sales or customers. The standard product for which the production schedule would be reduced has a unit sales price of $14,400 and the following cost structure.

Direct material ................................................................................... $ 3,000
Direct labor (250 hours at $18) ............................................................. 4,500
Manufacturing overhead (250 hours at $10.80) .......................................... 2,700

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

Solution Summary

The expert calculates the minimum bid for manufacturers. The direct material is determined.

$2.19