16. diagnosis of competitive position18 Ralph’s Packaging, Inc. (RP) designs and produces specialized packages for a variety of industrial product firms. Most jobs are won on a competitive bid. The major steps in the production process are design, printing, cutting, and assembly. Historically, RP has earned a 14% margin, but lately the margin has been declining and most recently was 7.2%. RP fears its earlier success has led to complacency and its costs are unnecessarily high. The accounting library identifies labor, material, subcontracting, energy, and space costs. Some are broken down by design, printing, cutting and assembly. Since work in process has never been a significant problem, no formal job costing system has been used.

At this point Ralph decides to look a little more closely at the cost conjecture. A recently completed job, job 113, is randomly selected.

Ralph searches through the purchase orders, stores requisitions, and subcontracting invoices and locates the following cost items that pertain to job 113:

miscellaneous materials 125 standard packaging materials 1,875 subcontracted printing 425 Working through payroll records, Ralph is also able to identify direct labor time. Three labor groups are present, regular, semi-skilled and skilled. Their respective wage rates are 11, 18 and 22 dollars per hour.
The time sheets record the following hours:
unskilled semi-skilled skilled design 10 11 34 printing 10 18 20 cutting 12 assembly 10 10 24 Finally, overhead averages 110% of labor cost. (To identify overhead cost, Ralph took the total of all manufacturing cost, subtracted the labor cost that could be identified with specific jobs and the material and subcontracting costs that could be similarly identified.)

(a) What was the unit cost of job 113?

(b) The bid sheet for job 113 shows that, at the time the job was bid, RP estimated the direct cost as follows:
materials 2,100 subcontract work 400 design labor 918 printing labor 799 cutting labor 238 assembly labor 714 for a total direct cost of 5,169. In turn, the job was bid using RP’s standard bidding rule of bid = 180% of estimated direct cost. For bidding purposes, labor is costed at 17 per hour. What was RP’s bid on job 113? Did RP earn a positive profit on this job?

(c) Suppose RP’s labor cost does average 17 per hour and that materials and subcontract work is, on average, equal to direct labor cost. Further suppose overhead averages 110% of labor cost.
Presuming many bidding successes using the noted bidding rule, what should RP’s margin be?

(d) What advice can you give RP? In particular, why do you think their margin is declining?

(e) Do you think they should invest in a sophisticated product costing system?