Problem 15-39

North American Pharmaceuticals, Inc. specializes in packaging bulk drugs in standard dosages for local hospitals. The company has been in business for seven years and has been profitable since its second year of operation. Don Greenway, Assistant Controller, installed a standard costing system after joining the company three years ago.

Wyant Memorial Hospital has asked North American Pharmaceuticals to bid on the packaging of one million doses of medication at total cost plus a return on total cost of no more than 15 percent. Wyant defines total cost as including all variable costs of performing the service, a reasonable amount of fixed overhead, and reasonable administrative costs. The hospital will supply all packaging materials and ingredients. Wyant has indicated that any bid over $.015 per dose will be rejected.

Greenway has accumulated the following information prior to the preparation of the bid.

Direct labor.. $8.00 per direct labor hour (DLH)

Variable overhead.. $6.00 per DLH

Fixed overhead.. $10.00 per DLH

Incremental administrative costs.. $1,000 for the order

Production rate. 2,000 doses per DLH

Required: 1. Determine how many direct-labor hours would be required each month to fill the Glasgow Industries order.

2. Prepare an analysis showing the impact of accepting the Glasgow Industries order.

3. Calculate the minimum unit price that Badger Valve and Fitting Companys management could accept for the Glasgow Industries order without reducing net income.

4. Identify the factors, other than price, that Badgers management should consider before accepting the Glasgow Industries order.

5. Build a spreadsheet: Construct an Excel spreadsheet to solve requirements (2) and (3) above. Show how the solution will change if the following information changes: the direct material and direct labor per unit are $4.90 and $6.10, respectively.