Bid price (Adapted from CMA, June 1991) Marcus Fibers, Inc. specializes in the manufacture of synthetic fibers that the company uses in many products such as blankets, coats, and uniforms for police and firefighters. Marcus has been in business since 1975 and has been profitable each year since 1983. The company uses a standard cost system and applies manufacturing support costs on the basis of direct labor hours.

Marcus has recently received a request to bid on the manufacture of 800,000 blankets scheduled for delivery to several military bases. The bid must be stated at full cost per unit plus a return on full cost of no more than 9% after income taxes. Full cost has been defined as including all variable costs of manu- acturing the product, a reasonable amount of fixed support costs, and reason¬ able incremental administrative costs associated with the manufacture and sale of the product. The contractor has indicated that bids in excess of $25 per blan¬ ket are not likely to be considered.

To prepare the bid for the 800,000 blankets, Andrea Lightner, cost accoun¬ tant, has gathered the following information about the costs associated with the production of the blanket:

REQUIRED

(a) Calculate the minimum price per blanket that Marcus Fibers, Inc. could bid without reducing the company's net income.

(b) Using the full cost criterion and the maximum allowable return specified, calculate Marcus Fibers, Inc/s bid price per blanket.

(c) Without prejudice to your answer to requirement

(b) above, assume that the price per blanket that Marcus Fibers, Inc. calculated using the cost-plus cri¬ terion specified is greater than the maximum bid of $25 per blanket allowed. Discuss the factors that Marcus Fibers, Inc. should consider before decid¬ ing whether to submit a bid at the maximum acceptable price of $25 per blanket.(LO 2, 3)

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COSTS Raw materials Direct labor Direct machine costs* Variable support Fixed support Incremental administrative costs Special fee** Material usage Production rate Effective tax rate AMOUNT $1.50 per pound of fibers $7.00 per hour $10.00 per blanket $3.00 per direct labor hour direct labor hour $8.00 per $2500 per 1000 blankets $0.50 per blanket 6 pounds per blanket 4 blankets per direct labor hour 40%