Question

Question 3 You are the accountant for FreeWheels Ltd, a tandem bicycle manufacturer that is located in Coffs Harbour and has customers in Australia and the USA. Their estimated current sales volume is 6,000 units per month and based on this level of production, the company has budgeted the following costs and prices per unit: Manufacturing Costs per unit (Based on production of 6,000 units per month) Direct Material Cost $75.00 Direct Labour Cost 35.00 Variable Factory Overhead 10.00 Fixed Factory Overhead 20.00 Total Manufacturing Cost 140.00 Selling & Administrative Costs Variable Selling and Administrative Cost 25.00 Fixed Selling and Administrative Cost 20.00 45.00 Total Cost Per Unit 185.00 Selling Price Per Unit $370.00 Cycle World Ltd is an overseas company that sells bicycles all over the world, with the majority of their market in China and India. They have approached FreeWheels about obtaining a quote for a special one-off order as they would like to purchase 25,000 bikes. As this will be a special order sale, there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred. This order is because their existing supplier has suffered substantial earthquake damage to their premises, but the CEO of Cycle World Ltd also hinted to your CEO that if they are satisfied with the product, this might not be the last deal between the two businesses. Required: 1. Given this knowledge, what amount should FreeWheels Ltd. bid for this contract in each of the following circumstances: a) The FreeWheels’s annual factory capacity is 100,000 units. b) The FreeWheels’s annual factory capacity is 90,000 units. (To fulfil the order, you may have to pull the product from your regular production). 2. Assuming that the annual factory capacity is 100,000 units, prepare a report for your CEO explaining your justification for the bid price that you came up with in 1 a). Discuss the possible opportunities and potential disadvantages with accepting this contract with Cycle World. Give both quantitative and qualitative support to your discussion.

Answer 1

Hey there!

let me help you with this question...we have to calculate the bid price of the order in 2 circumstances.

When the Capacity is 100,000 units and when the capacity is 90,000 units.

Let us first list down the details given in the question in a condensed form.

Current Sales Volume	6,000 units per month
Units produced	6,000
Direct Material Cost	75
Direct Labour Cost	35
Variable Factory Overhead	10
Fixed Factory Overhead	20
Total Manufacturing Cost	140
Selling & Administrative Costs
Variable Selling and Administrative Cost	25
Fixed Selling	20
	45
Total Cost Per Unit	185
Selling Price Per Unit	370

Current Sales Volume	6,000 units per month	Production per anum	Capacity is 100,000 unit	Capacity is 90,000 units
Units produced	6,000	72000	72,000	72,000
No of Units produced for Cycle World			25,000	23,000
Total			97,000	95,000
			Cost for 25000 Units	Cost for 23000 Units
Direct Material Cost ( Units x per unit cost 75$)	75	5,400,000	1,875,000	1,725,000
Direct Labour Cost ( Units x per unit cost 35$)	35	2,520,000	875,000	805,000
Variable Factory Overhead ( Units x per unit cost 10$)	10	720,000	250,000	230,000
Fixed Factory Overhead ( Units x per unit cost 20$)	20	1,440,000	-	-
Total Manufacturing Cost	140	10,152,000	3,000,000	2,760,000
Selling & Administrative Costs
Variable Selling and Administrative Cost	25	1,800,000	-	-
Fixed Selling	20	1,440,000	-	-
Total Selling Cost	45	3,240,000	-	-
Total Cost Per Unit (A)	185	13,392,000	3,000,000	2,760,000
Selling Price Per Unit (B)	370	26,640,000
Net Profit (B-A)	185	13,248,000
Minimum Bid Price			3,000,000	2,760,000

As this will be a special order sale, there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred.

I hope the above working is clear to you now....with this you wioll be able to get through the question...do let me know in case of any concerns.

All the best !!

happy studying :)