Cost Data for Managerial Purposes
Graphic Components (GC) has offered to supply the Federal Aviation Agency (FAA) with computer monitors at “cost plus 20 percent.” GC operates a manufacturing plant that can produce 22,000 monitors per year, but it normally produces 20,000. The costs to produce 20,000 monitors follow:
|
|
Total Cost |
Cost per Case |
|
Production costs: |
|
|
|
Materials |
$ 1,000,000 |
$ 50 |
|
Labor |
2,000,000 |
100 |
|
Supplies and other costs that will vary with production |
600,000 |
30 |
|
Indirect cost that will not vary with production |
600,000 |
30 |
|
Variable marketing costs |
400,000 |
20 |
|
Administrative costs (all fixed) |
1,200,000 |
60 |
|
Totals |
$ 5,800,000 |
$290 |
Based on these data, company management expects to receive $348 (= $290 × 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $174,000 (= 500 monitors × $348 per monitor). The president of the company received a call from an FAA representative, who stated that the per monitor cost should be
|
Materials |
$ 50 |
|
Labor |
100 |
|
Supplies and other costs that will vary with production |
30 $180 |
Therefore, the price per monitor should be $216 (= $180 × 120 percent). The FAA ignored marketing costs because the contract bypassed the usual selling channels.
Required
What price would you recommend? Why?