A family owned business is interested in submitting a bid for a contract to supp
ID: 361488 • Letter: A
Question
A family owned business is interested in submitting a bid for a contract to supply 12,544 pairs of heavy duty gloves per to Agriculure company. After a recent modernization of its gloves manufactering plant, during this past quarter this compan has filed another customer's order for 28,000 pairs of gloves produced at a toal cost of $296,800. Additionally, company records shows that the AFC at a level of production of 14,000 pairs is $11.20
The company is confident that they stand a very good chance of being awarded the contract by submitting a bid that would be 22.5% higher than their break even price for each of the 12,544 pairs of gloves that the contract stipulates. Assuming the AVC remain constant, please calculate this company's bid price.
Explanation / Answer
It is given that :
Average fixed cost ( AFC ) at level of production of 14,000 is $11.20
Therefore, total fixed cost = 14000 x $11.20 =$156,800
It is also given that total cost for 28,000 gloves is $296,800
Since Total cost = Total variable cost + Total fixed cost ,
Therefore,
$ 296,800 = Total variable cost + $ 156,800
Or, Total variable cost for 28000 gloves = $296800 - $156800 = $140,000
Therefore, Average Variable cost ( AVC) = $140,000/ 28000 = $5
Hence,
Total cost for 12544 pairs of gloves
= AVC x Number of gloves + Total fixed cost
= 5 x 12544 + 156800
= 62720 + 156800
= 219520
Since at breakeven price ,
Total cost = Total revenue = Breakeven price x Number of pairs of gloves
Therefore ,
Breakeven price = 219520 / 12544 = $17.5
Since Bid price will be 22.5 % higher than breakeven price,
Bid price = 1.225 x $17.5 = $21.4375 ( $21.44 rounded to 2 decimal points )
COMPANY’S BID PRICE = $21.44 PER PAIR OF GLOVES
COMPANY’S BID PRICE = $21.44 PER PAIR OF GLOVES
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