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
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
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.
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What price would you recommend? Why?
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