Question
You are the accountant for FreeWheels Ltd, a tandem bicycle manufacturer that is located in Coifs 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)
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Direct Material Cost
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$75.00
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|
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Direct Labour Cost
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35.00
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|
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Variable Factory Overhead
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10.00
|
|
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Fixed Factory Overhead
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20.00
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|
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Total Manufacturing Cost
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140.00
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|
Selling & Administrative Costs
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|
|
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Variable Selling and Administrative Cost
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25.00
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|
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Fixed Selling and Administrative Cost
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20.00
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45.00
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Total Cost Per Unit
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185.00
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|
Selling Price Per Unit
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$370.00
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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 I a). Discuss the possible opportunities and potential disadvantages with accepting this contract with Cycle World. Give both quantitative and qualitative support to your discussion.