ACE MANUFACTURING: Identifying True Costs for Pricing Ace Manufacturing earns revenues of $2,100,000 annually on 150,000 unit sales of an industrial part. The part is priced at $14 each. A potential customer, in an industry that the company has not previously served, asks ACE to submit a bid for a similar product that ACE could produce in the same facility using much of the same capital equipment. The new customer would purchase 30,000 units annually.

After evaluating this customer's needs and identifying the substitute product, ACE's sales engineers conclude that a bid in the range of $10 per unit would be required to win this account. However, since the durability required by this customer was below ACE's usual standards, the engineers felt that cheaper materials could be used. ACE's engineers estimate that the variable cost of manufacturing this product, using the cheaper materials, will be $2.50 /unit. ACE will also require some additional production capacity that will increase fixed costs by $90,000. G&A costs to service this account will be approximately $60,000 annually. Total Dollars Dollars Per Unit 150,000 units 180,000 units 150,000 units +30,000 +30,000 Revenues $2,100,000 $14.0 Costs Direct Variable Costs 450,000 3 Direct Fixed Costs 750,000 5 General & Admin. Costs 675,000 4.5 Total Costs 1,875,000 12.5 Profits $225,000 $1.5 QUESTIONS

What is the relevant unit cost for making this pricing decision?

Is this business sufficiently profitable to make bidding worthwhile?