(CMA, adapted) Marcus Fibers, Inc., specializes in manufacturing synthetic fibers,which the company uses in many products, such as blankets. The company usesa standard costing system and allocates overhead costs on the basis of direct manufacturing labour-hours.Marcus has recently received a request from Thermco, Inc., to bid on the manufacture of 800,000 blankets. 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 of manufacturing the product, a reasonable amount of fixed manufacturing overhead, and a reasonable amount of incremental administrative costs associated with the manufacture and sale of the product. Thermco has indicated that bids in excess of $25 per blanket are not likely to be considered.In order to prepare the bid for the 800,000 blankets, Andrea Lightner, cost accountant, has gathered the following information about the cost associated with blanket Direct materials costs $1.50 per pound of fibersDirect manufacturing labour costs $7.00 per hourDirect machine costs* $10 per blanketVariable manufacturing overhead costs $3.00 per direct manufacturing labour-hourFixed manufacturing overhead costs $8.00 per direct manufacturing labour-hourIncremental administrative costs $2,500 per 1,000 blanketsSpecial fee † $0.50 per blanketMaterials usage 6 pounds per blanketProduction rate 4 blankets per direct manufacturing labour-hourEffective tax rate 40% Direct machine costs consist of items such as special lubricants, replacements of needles used in stitching and maintenance costs. These costs are not included in the budgeted overhead rates. Marcus recently developed a new blanket fiber at a cost of $750,000. In an effort torecover this cost, Marcus has instituted a policy of adding a $0.50 fee to the cost ofeach blanket that uses the new fiber. To date, the company has recovered $125,000.Lightner knows that this fee does not fit within the definition of full cost because it isnot a cost of manufacturing the product. a. Calculate the minimum price per blanket that Marcus Fibers, Inc., could bid withoutchanging the company’s net income. b. Using the full cost criterion and the maximum allowable return specified, calculateMarcus Fibres’ bid price per blanket. c. Without considering your answer to requirement b., assume that the price per blanket that Marcus Fibers calculated using the cost-plus criterion is greater than the maximum bid of $25 per blanket allowed. Discuss the factors that Marcus Fibers should consider before deciding whether or not to submit a bid at the maximum acceptable price of $25per blanket.
(CMA, adapted) Marcus Fibers, Inc., specializes in manufacturing synthetic fibers,
which the company uses in many products, such as blankets. The company uses
a
Marcus has recently received a request from Thermco, Inc., to bid on the manufacture of 800,000 blankets. 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 of manufacturing the product, a reasonable amount of fixed manufacturing overhead, and a reasonable amount of incremental administrative costs associated with the manufacture and sale of the product. Thermco has indicated that bids in excess of $25 per blanket are not likely to be considered.
In order to prepare the bid for the 800,000 blankets, Andrea Lightner, cost accountant, has gathered the following information about the cost associated with blanket
Direct materials costs $1.50 per pound of fibers
Direct manufacturing labour costs $7.00 per hour
Direct machine costs* $10 per blanket
Variable manufacturing overhead costs $3.00 per direct manufacturing labour-hour
Fixed manufacturing overhead costs $8.00 per direct manufacturing labour-hour
Incremental administrative costs $2,500 per 1,000 blankets
Special fee † $0.50 per blanket
Materials usage 6 pounds per blanket
Production rate 4 blankets per direct manufacturing labour-hour
Effective tax rate 40%
Direct machine costs consist of items such as special lubricants, replacements of needles used in stitching and maintenance costs. These costs are not included in the budgeted overhead rates.
Marcus recently developed a new blanket fiber at a cost of $750,000. In an effort to
recover this cost, Marcus has instituted a policy of adding a $0.50 fee to the cost of
each blanket that uses the new fiber. To date, the company has recovered $125,000.
Lightner knows that this fee does not fit within the definition of full cost because it is
not a
a. Calculate the minimum price per blanket that Marcus Fibers, Inc., could bid without
changing the company’s net income.
b. Using the full cost criterion and the maximum allowable return specified, calculate
Marcus Fibres’ bid price per blanket.
c. Without considering your answer to requirement b., assume that the price per blanket that Marcus Fibers calculated using the cost-plus criterion is greater than the maximum bid of $25 per blanket allowed. Discuss the factors that Marcus Fibers should consider before deciding whether or not to submit a bid at the maximum acceptable price of $25
per blanket.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
