A firm is considering to bid as an assembly subcontractor for a new boat. The initial investment (which involves activities such as training, acquisition/production of special tools, re-design of work area) is $250,000. The negotiated contract price per unit to be built is $160,000. The contract entails production of 10 units of the product. The management estimates the costs as follows. (i) Raw materials and utilities: $70,000 per unit produced; (ii) Hourly wage is $16 per worker; (iii) Miscellaneous variable expenses charged at 20% of direct labor costs. Based on the design and related process charts, the management estimates that a unit would take 400 hours to make by a team of 11 workers. The management estimates that the assembly team will experience 70% learning. MANAGERIAL ISSUES: Should the company bid for the contract? (Is it profitable?) What is the impact of learning on the firm’s decision? To address the above managerial issues, consider the following questions: 1. Does the firm break even in there is no learning? If so, what is the break-even quantity? What is the profit? 2. Does the firm break even if there is learning? If so, what is the break-even quantity? What is the profit?

Answer rating: 100% (QA)

1 No the firm does not break even if there is no learning The initial investment of 250 000 would not be covered by the revenue from 10 units at 160 0... View the full answer