Hall Company specializes in packaging bulk drugs in standard dosages for local hospitals. The company has been in business since 20A and has been profitable since its second year of operation. D. Greenway, director of cost accounting, installed a standard cost system after joining the company in 20E.
Wyant Memorial Hospital has asked Hall to bid on the packaging of one million doses of medication at full cost plus a return on full cost of no more than 9% after income taxes. Wyant defines cost as including all variable costs of performing the service, a reasonable amount of non-variable overhead, and reasonable administrative costs. The hospital will supply all packaging materials and ingredients. Wyant has indicated that any bid over $.015 per dose will be rejected.
Greenway accumulated the following information prior to the preparation of the bid.
Direct labor ............................................. $ 5.00 per hour
Variable factory overhead ............................ $ 2.00 per direct labor hour
Fixed factory overhead ............................... $ 5.00 per direct labor hour
Administrative costs ................................. $1,000 for the order
Production rate .......................................... 1,000 doses per direct labor hour
Hall Company is subject to an effective income tax rate of 40%.
Required:
(1) Calculate the minimum bid price per dose that Hall Company can bid for the Wyant Memorial Hospital job and not reduce Hall's net income.
(2) Calculate the bid price per dose using the full cost criterion and the maximum allowable return specified by Wyant Memorial Hospital.
(3) Without prejudice to your answer to requirement 2, assume that the price per dose that Hall Company calculated using the cost-plus criterion specified by Wyant Memorial Hospital is greater than the maximum bid of $.015 per dose specified by Wyant. What factors should Hall Company consider before deciding whether to submit a bid at the maximum price of $.015 per dose?
(4) What factors should Wyant Memorial Hospital have considered before deciding whether to employ cost-plus pricing?