Backwoods Incorporated manufactures rustic furniture. The cost accounting system
ID: 2479431 • Letter: B
Question
Backwoods Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods’ policy to add a 50% markup to full costs for only long-term orders.
Backwoods is invited to bid on an order to supply 100 rustic tables. Backwoods bid $5,600 on this one time only short term order.
A large hotel chain is currently expanding and invited Backwoods to bid on 100 tables long term. Backwoods lowest price per unit on this was $120 per unit.
What are the effects of the short-term versus the long-term horizon on the bid price in this response?
Explanation / Answer
Manufacturing Cost = $ 80 per table $ Variable Cost 70% 56 Fixed Cost 30% 24 Total Cost 80 Short term Order Long term Order $ $ Bid price 5,600 Qty 100 100 Rate per Pc 56 120 Variable cost per unit 56 56 Contribution per unit - 64 Effects of Short term vs long term horizon on the bid price 1. Short term horizon is only good for the period of idle capacity of the firm, but it keep the idle capacity after the completion of the order, where as in long term orders is always better to utilize the full capacity of the firm for the long term. 2. In the given case, short term order does not help to Blackwood in recovering of the fixed cost even for the shorter period as its contribution per unit is Rs Nil., whereas long term order gives the blackwood $ 64 per unit contribution increase. 3. There fore, in all the cases long term order is beneficial for the blackwood in comparison of short term order.
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