Florida Fruits, Inc., agreed to sell 40,000 cases of Fang, a dehydrated fruit drink, to NASA for use on the international space station at “cost plus 10 percent.” The company operates a manufacturing plant that can produce 120,000 cases per year, but it normally produces 80,000. The costs to produce 80,000 cases are as follows:
Total Per Case Direchimaterialitn...2 kee heeaks. 0) See a Eee 960,000$960,000$12.00 BikeCilabe temas Aix nash. ta bak eet (pest met Rie 1,520,000 19.00 Supplies and other costs that vary with production....... 640,000 8.00 Costs that do not vary with production................. 440,000 5,50 Variablersellin@iCoStStexte =: cee watece ehee 160,000 2.00 Administrativercosts (allltiixed))iyie reat ae eeecee lyy eu rs 160,000 2.00 TOA aie te MR omar eit eR eee teva a! Rebar ih. 3,880,000$3,880,000$48.50 Based on these data, company management expects to receive 53.35(thatis,$53.35(\mathrm{????}ℎ\mathrm{????}\mathrm{????}\mathrm{????}\mathrm{????},$48.50 x 110 percent)
per case for those sold on this contract. After completing 10,000 cases, the company sent a bill (invoice) to the government for 533,500(thatis,10,000casesat$533,500(\mathrm{????}ℎ\mathrm{????}\mathrm{????}\mathrm{????}\mathrm{????},10,000\mathrm{????}\mathrm{????}\mathrm{????}\mathrm{????}\mathrm{????}\mathrm{????}\mathrm{????}$53.35 per case).
The president of the company received a call from a NASA representative, who stated that the percase cost should be as follows:
Material sceccmacste ae ccc ene yat ears cece anne eon ene 12Ii1OeG)acreeeeeeELTaearOREActiiacktecameamathr8Hiraned19SuppliesandothercoststhatVaywithOrOCUCTION.:ai:22«ce12????????1????????????)????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????ℎ????8????????????????????????????19????????????????????????????????????????????????????ℎ????????????????????????????????ℎ????????????????????????????????ℎ????????????????????????????????????????.:????????:22«????????<????00???????????????????????????????????????????????????????????????????????????????????? ????????????????????????????????????????????????????????????????????7????????????04????????????????????????????????????????????????????????39 Therefore, the price per case should be 42.90(thatis,$42.90(\mathrm{????}ℎ\mathrm{????}\mathrm{????}\mathrm{????}\mathrm{????},$39 x 110 percent). NASA ignored selling costs because the contract bypassed the usual sales channels.
Required What price would you recommend? Why? Write a memo to management explaining your reasoning.
(Note: You need not limit yourself to the costs selected by the company or by the NASA representative.)