Question

Q2) A firm is considering to bid as an assembly subcontractor for a new boat. The contract requires assembly of 13 boats. The initial investment (which involves activities such as training, acquisition/production of special tools, re-design of work area) is $610,000. The management estimates the costs as follows. (i) Raw materials and utilities: $70,000 per unit produced; (ii) Hourly wage is $21 per worker; (iii) Miscellaneous variable expenses charged at 35% of direct labor costs. Based on the design and related process charts, the management estimates that a unit would take 650 hours to make by a team of 14 workers. On a similar project in the past, assembly was done by a team of 10 people. The assembly times by this team of 10 workers for the 16 units produced during the project are provided below.

Project 1st )Unit number produced in project 2nd)Team assembly time (hours)

QA485983

1   396

2 278

3 226

4  194

5 173

6 157

7 147

8 139

9 129

10 121

11 116

12 110

13 107

14    105

14   99

16 98

You have been called in for help to make a final decision. a. What should be the minimum negotiated contract price per unit so that the contract is profitable for the firm? (Analytically justify your answer for credit.) b. What are some of the key assumptions behind your reasoning/analysis that may affect the decision?

Answer 1

Costs for 13 Boats	Amt $
Initial Investment costs - Training, Acquisitio, Production of special tools	$           610,000
Raw Materials and utilities (70000*13)	$           910,000
Direct Labour Cost (13*650*21)	$           177,450
Miscelleneous Variable Expenses(35% * 177450)	$       62,107.50
Assembly costs- Note	$             35,595
Total Costs	$       1,795,153
Costs per unit	$     138,088.65
(1795153/13)
Hence the minimum contract price per unit should be $ 138089 to recover costs and to gain profit the sale proce should be higher than $ 138089
Assembly costs
Unit no	Assmbly time	Need to Assemble	Costs
1	396	No	$               -
2	278	No	$               -
3	226	No	$               -
4	194	Yes	$        4,074
5	173	Yes	$        3,633
6	157	Yes	$        3,297
7	147	Yes	$        3,087
8	139	Yes	$        2,919
9	129	Yes	$        2,709
10	121	Yes	$        2,541
11	116	Yes	$        2,436
12	110	Yes	$        2,310
13	107	Yes	$        2,247
14	105	Yes	$        2,205
15	99	Yes	$        2,079
16	98	Yes	$        2,058
			$     35,595
Assumption:
1. There are only 13 unit required hence unit no 1, Unit no 2, Unit no 3 are not considerd for assembly as the hours are higher.
2. The labour wage for assembly and direct labour cost are same as $ 21 per hour.