Manhattan Pharmaceuticals, Inc., specializes in packaging bulk drugs in standard dosages for local hospitals. Wyant Memorial Hospital has asked Manhattan 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’s administrator has indicated that any bid over $.03 per dose will be rejected. The controller for Manhattan Pharmaceuticals has accumulated the following data prior to the preparation of the bid.

Direct labor.........................................................$16.00 per direct-labor hour (DLH)

Variable overhead............................................... $12.00 per DLH

Fixed overhead................................................... $20.00 per DLH

Incremental administrative costs........................ $2,000 for the order

Production rate................................................... 2,000 doses per DLH

Required:

1. Calculate the minimum price per dose that Manhattan Pharmaceuticals could bid for the Wyant Memorial Hospital job that would not reduce the pharmaceutical company’s income.

2. Calculate the bid price per dose using total cost and the maximum allowable return specified by Wyant Memorial Hospital.

3. Independent of your answer to requirement (2), suppose that the price per dose that Manhattan Pharmaceuticals, Inc., calculated using the cost-plus criterion specified by Wyant Memorial Hospital is greater than the maximum bid of $.03 per dose allowed by Wyant. Discuss the factors that the pharmaceutical company’s management should consider before deciding whether or not to submit a bid at the maximum price of $.03 per dose that Wyant allows.