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. Calculate the minimum price per dose that North American 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 North American Pharmaceuticals, Inc. calculated using the cost-plus criterion specified by Wyant Memorial Hospital is greater than the maximum bid of $.015 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 $.015 per dose that Wyant allows?