Problem
Manhattan Pharmaceuticals, Inc., specializes in packaging bulk drugs in standard dosages for local hospitals. Wyant Memorial Hospital has asked Manhattan Pharmaceuticals to bid on the packaging of one million doses of medication at total cost plus a return on total cost of no more than 30 percent. Wyant defines total cost as including all variable costs of performing the service, a reasonable amount of fixed overhead, and reasonable administrative costs. The hospital will supply all packaging materials and ingredients. Wyant's administrator has indicated that any bid over $0.06 per dose will be rejected. The controller for Manhattan Pharmaceuticals has accumulated the following data prior to the preparation of the bid.
Direct labor $ 19.00 per direct-labor hour (DLH)
Variable overhead $ 15.00 per DLH
Fixed overhead $ 23.00 per DLH
Incremental administrative costs $ 2,300 for the order
Production rate 4,000 doses per DLH
Required
1. Calculate the minimum price per dose that Manhattan Pharmaceuticals could bid for the Wyant Memorial Hospital job that would not reduce the pharmaceutical company's income.
2. Calculate the bid price per dose using total cost and the maximum allowable retur specified by Wyant Memorial Hospital.
3. Independent of your answer to part (2), suppose that the price per dose thi Manhattan Pharmaceuticals, Inc., calculated using the cost-plus criterion specified Wyant Memorial Hospital is greater than the maximum bid of $0.06 per dose allowe by Wyant. Discuss the factors that the pharmaceutical company's management shoul consider before deciding whether or not to submit a bid at the maximum price ( $0.06 per dose that Wyant allows.
Whether the maximum bid of $0.06 contributes toward covering fixed costs.
Fixed overhead already incurred.
Whether there are available jobs on which earnings might be greater.
Whether Manhattan Pharmaceuticals has excess capacity.