Tops Tools has offered to supply the Department of the Army with screwdrivers at “cost plus 20 percent.” Tops Tools operates a manufacturing plant that can produce 220,000 cases of screwdrivers per year, but it normally produces 200,000. The costs to produce 200,000 cases of screwdrivers follow:

Based on these data, company management expects to receive $34.80 (= $29 X 120 percent)
per case for those sold on this contract. After completing 5,000 cases, the company sent a bill (invoice) to the government for $174,000 (= 5,000 cases X $34.80 per case).

The president of the company received a call from an army representative, who stated that the per case cost should be

Therefore, the price per case should be $21.60 (= $18 X 120 percent). The army ignored marketing costs because the contract bypassed the usual selling channels.
Required What price would you recommend? Why? (Nore: You need not limit yourself to the costs selected by the company or by the government agent.)

Transcribed Image Text:

Production costs: Materials Labor.. Supplies and other costs that will vary with production Costs that will not vary with production Variable marketing costs Administrative costs (all fixed) Totals Total Cost $1,000,000 Cost per Case $ 5.00 2,000,000 10.00 600,000 3.00 600,000 3.00 400,000 2.00 1,200,000 6.00 $5,800,000 $29.00