One of your suppliers has requested a 6% price increase next year (from $178.71 to $189.43) due to a price increase of a chemical compound used to manufacture its product, which your company buys.

The supplier also indicated its direct labor costs increased 3% recently due to a scheduled increase in its labor contract. And, the supplier indicated its SG&A costs went up by 4% during the last contract period. As far as you are aware, there are no other cost increases than the ones identified here. Assume the supplier expects to maintain its current profit margin.

You have collected or possess the following information as you consider the next annual contract price:

(1) market index data for the chemical compound from www.bls.gov. (see below)

(2) the suppliers cost breakdown (obtained earlier during the RFP process) (see below)

(3) knowledge that the chemical compound comprises 40% of the suppliers total material costs

(4) your company expects its demand for the item next year to be similar to this years demand

Chemical compound price index:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016 167.4 170.3 171.5 172.5 172.1 174.5 175.4 177.8 177.7 178.0 178.0 179.2

Current contract cost breakdown per unit:

Materials $35.14 Direct labor $40.89 Overhead $61.33 (allocated at 150% of DL) SG&A $25.10

Total Costs: $162.46

Profit $16.25

Current price per unit $178.71

Using the template on the next page and the data in your possession recalculate the suppliers proposed new unit price for next years contract. (10 points)

Cost per unit:

Materials $____________

Direct labor $____________

Overhead $____________ (allocated at 150% of DL)

SG&A $____________

Total Costs: $____________

Profit $____________

Proposed price per unit $____________

Is this higher price being requested by the supplier justified by the economics? Why or why not? (10 points)

(Support your answer quantitatively).