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You have been approached by potential client who could bring you considerable business. She says, I would like to find an alternative vendor for future orders of 5,000 /y., but their pricing must be competitive.
Your CFO has supplied you with the following information. Current product
. Selling price per unit . $5,000
. $1,400/ unit direct material
. $400/ unit variable labor
. $200/ unit variable
. $200/ unit fixed overhead (this figure is the results of the budgted fixed overhead $2,000,000 and budgeted sales volume of 10,000 units
. Income tax rate =40%
The board of directors has requested a though presentation to determine whether taking on this potential customer si good idea. Assume that your factor ia fully operational and that you will not have any learning curve impacts. In your presentation, answer the following question from the board using the data from the CFO.
1. What is meant by cost variance?
2. What is an effective way to incorporate
3. What are the differences between labor and material variance?
4. How is the quantity variance different from rate variance?
5. What are the subcomponents of fixed overhead?
6. What are the subcomponent of variance overhead?
7. What is the lowest possible price you offer to this potential customer ( you know that have sufficient capacity without working overtime and without adding any new equipment to make this order)? Please show the calculations.
8. In terms of capacity, under what conditiona could be offering this lowest possible price be bad decisions ? Why?
9. Creat a pro- forma income statement to show a net income/ net loss for the year.
10. You have been considering investing in automation to eliminate some factor labor if you get this large order. This technology advancements will cost an added $100,000/yr.to lease (net of taxes), but it will reduce the labor cost/ unit on the customer's unit by 50% . How would this change the lowest price you offer to this potential customer and at least break even ? Please show calculations.
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