Farley, Inc. is a manufacturer that produces customized computer components for several well-known computer-assembly companies. Farley’s latest contract with CompWest.com calls for Farley to deliver sound cards that simulate surround sound from two speakers. Farley spent several hundred thousand dollars to design the sound card to meet CompWest.com’s specifications.
Farley’s president, Bryon Wilson, has stipulated a pricing policy that requires the bid price for a new job to be based on Farley’s estimated costs to design, manufacture, distribute, and provide customer service for the job, plus a profit margin. Upon reviewing the contract figures, Farley’s controller, Paul York, was startled to find that the cost estimates developed by Farley’s cost accountant, Tony Hayes, for the CompWest.com bid were based on only the manufacturing costs. York is upset with Hayes. He is not sure what to do next.
1. How did using manufacturing cost only, instead of using all costs associated with the CompWest.com job, affect the amount of Farley’s bid for the job?
2. Identify the parties involved in Paul York’s dilemma. What are his alternatives? How would each party be affected by each alternative? What should York do next?