Alameda Instruments (AI) has offered to supply the Air Force with computer monitors at cost plus 20 percent. AI operates a manufacturing plant that can produce 44,000 monitors per year, but it normally produces 40,000. The costs to produce 40,000 monitors follow:
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Based on these data, company management expects to receive $174 (= $145 - 120 percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $87,000 (= 500 monitors - $174 per monitor). The president of the company received a call from an Air Force auditor, who stated that the per monitor cost should be:
Materials......................................................................................... $25
Labor............................................................................................... 50
Supplies and other costs that will vary with production................. 15
$90Therefore, the price per monitor should be $108 (= $90 - 120 percent).
The Air Force ignored marketing costs because the contract bypassed the usual selling channels.
Required :
1.What price would you recommend?Why?