Banyan Industries Limited (Banyan) manufactures various models of alternators, mainly for the North American automobile industry. The company, located in Canada, has grown steadily over the past 15 years and, two years ago, installed a computer automated manufacturing system that significantly increased manufacturing capacity. Sales over the past few years have not grown at the rate predicted; therefore, the plant has been operating at well below capacity. The president is very concerned about this situation and has put the objective of increasing sales volume at the top of his list of priorities. Banyan sells alternators in three main markets: (1) North American automobile manufacturers, (2) North American automotive replacementparts distributors, and (3) foreign automobile manufacturers and replacement-part distributors. Sales are made to automobile manufacturers through a contract bidding process, and contracts are generally long term. Bids are prepared by the accounting department and are then reviewed and approved by the president before submission to the potential customer. No sales commissions are paid for sales to automobile manufacturers. Sales to replacement-parts distributors are made by sales staff who use a standard price list for standard models of alternators. Sales staff are each paid a base salary plus a 5 percent commission on the gross value of orders received from the salesperson’s designated territory. Sales staff have some discretion to deviate from listed prices; however, for orders of more than 2,000 units, any deviations from listed prices must be approved by head office. Banyan currently has sales commitments that would utilize 60 percent of its capacity over the 2010 year. From past experience, it can expect additional short-term sales during 2010 that would require 10 percent of its capacity. Four potential contracts awaiting renewal and approval by the president are as follows: 1. Ovlov Motors is open for tenders on a contract for 50,000 alternators during 2010. The standard bid proposal prepared by the accounting department is shown in Exhibit 8A-1. 2. National Auto Parts has requested a 20 percent discount on the list price for a large order of 20,000 model Z-20 alternators for delivery at staggered times during 2010 (see Exhibit 8A-2). National Auto Parts is a retail distributor and an important customer of Banyan. 3. A Pacific Rim exporter has approached Banyan to supply 100,000 alternators to its specifications at a price well below the normal list price (see Exhibit 8A-3). 

Note: National Auto Parts has indicated that it could obtain the required alternators from an offshore supplier at the $71.76 per unit discounted price, but, because it has dealt with Banyan for a long time, it wanted to give Banyan a chance to match this price. 

Required. 

1. Assuming that Banyan has sufficient capacity to handle all four potential contracts, analyze and propose a pricing strategy for each of the four contracts. Include in your analysis a discussion of all considerations and implications involved in making a decision regarding the approval of each potential contract. 

2. Assume that, for 2010, Banyan has idle capacity of only 600,000 machine-hours available for the four potential contracts. Indicate how your answers to requirement 1 would change given this new assumption. 

3. Evaluate Banyan’s current pricing strategy.

Transcribed Image Text:

Exhibit 8A-1 Ovlov Motors Contract for 50,000 Alternators Cost per Unit Direct materials 25.00 Direct labour 5.00 Factory overhead (10 machine hours @ $4/hr.) Total manufacturing cost Target markup (20%) Target sales price 40.00 70.00 14.00 $ 84.00 Standard bid for 50,000 units $4,200,000 $4,000,000 Proposed bid Exhibit 8A-2 National Auto Parts Order for 20,000 Model Z-20 Alternators Cost per Unit Direct materials 24.00 Factory overhead (10 machine hours @ $4/hr.) Total manufacturing cost Target markup (30%) Target sales price Standard price for 20,000 units 40.00 69.00 20.70 $ 89.70 $1,794,000 $ 89,700 $ 358,800 Sales commission Discount requested by National Auto Parts (20%)