SOLUTION: 15-48

BID BASED ON STANDARD PRICING POLICY:

Direct material ........................................................................................... $307,200

Direct labor (11,000 DLH @ $18.00) ......................................................... 198,000
Manufacturing overhead (11,000 DLH @ $10.80) ................................... 118,800
Full manufacturing costs ..................................................................... $624,000
Markup (50% of full cost) ......................................................................... 312,000
Standard pricing policy bid ...................................................................... $936,000

1. Minimum bid acceptable to Bair Company:

Direct material ........................................................................................... $307,200

Direct labor (11,000 DLH @ $18.00) ......................................................... 198,000
Variable manufacturing overhead (11,000 @ $6.48a) ............................. 71,280
Opportunity cost of lost salesb ................................................................ 42,240
Minimum bid ............................................................................................. $618,720

aProportion
budgeted variable overhead
of variable overhead =
budgeted total overhead
$1,166,400
=
$1,944,000
= 60%
 total overhead  variable 
Variable overhead rate =     
 rate   overhead proportion
= ($10.80)  (.6)
= $6.48

bSellingprice per unit of standard product ........................ $14,400

Variable costs per unit
Direct material ............................................................. $3,000
Direct labor (250 DLH @ $18.00) ................................ 4,500
Variable overhead (250 DLH @ $6.48) ....................... 1,620 9,120
Net contribution per unit ..................................................... $ 5,280
Standard product requirements (12,000 DLH  3) ............ 36,000 DLH
Special order requirements ................................................ 11,000 DLH
Total hours required ............................................................ 47,000 DLH
Plant capacity per quarter (15,000 DLH  3) ...................... 45,000 DLH
Shortage in hours ................................................................ 2,000 DLH
 Lost unit sales (2,000 DLH ÷ 250 DLH) ..............................  8
Lost contribution ................................................................. $42,240

3. Lyan Company’s assistant purchasing manager is not acting ethically. The details
of the bid submitted by Bair Company are confidential between Bair Company and
Lyan Company. It is unfair and unethical to give this information to Bair’s
competitor. If Lyan Company had wanted competing bids on the specialized
equipment, the bids should have been solicited at the same time from the relevant
set of manufacturers. Each competing firm should receive the same specifications
on the customized equipment and be given the same time frame in which to
complete the bid. Moreover, the competing firms should be made aware that more
than one bid is being solicited.