4. The Cole Company is a large manufacturer of electrical components which requi

Question

4. The Cole Company is a large manufacturer of electrical components which require a great deal of hand work. They are preeminent in the field of electronic components, and are desirous of getting into more Government work. They are bidding on a large Government contract. The program has been announced as Fixed Price with economic price adjustment. With the Cole Company’s production capacity, they are favored to win the program. The Program Manager is guiding the proposal preparation, and for personal reasons, would like to get a program that produces a large profit. This work is very labor intensive, and learning curve rates are critical to the final price to be proposed. The company has a good accounting system, and has data on learning curves over many years. On several programs with production activities similar to those they are proposing on, the company has data showing a history of 70% learning. The Program Manager is advised that learning curves are merely a matter of estimates, and therefore not subject to defective cost pricing challenges. Using a 90% learning curve for the effort would raise the total estimated cost of the project dramatically. Knowing that the company was in a strong competitive position, the Program Manager decided to use 90% as the learning curve for this contract. The rationale was that it was only an estimate, and therefore not subject to the defective pricing rules. The Program price using the 90% learning factor was: $20,000,000 The Program price using a 70% learning factor was: $19,000,000 The Cole Company was the winner of the competition at a fixed price of $20,000,000. Later, the company was challenged on a defective pricing issue, for using the 90% learning curve in establishing their price. Under the Defective Cost or Pricing Data regulation, the Government demanded a $1,000,000 price reduction in the contract. What would be the result, and why?

Explanation / Answer

The result would be that the company can still go ahead with the contract because on several programs with production activities similar to those they are proposing on, the company has data showing a history of 70% learning. The Program price using a 70% learning factor will be : $19,000,000 and the Cole company can still complete the contract . The profits of the company would decline but the contract can still be completed with a reasonable profit.

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