Problem:
Lyan needs the custom-designed equipment to increase its bottle-making capacity so that it will not have to buy bottles from an outsider supplier. Lyan company requires 5,000,000 bottles annually. Its prsent equipment has a maximum capacity of 4,500,000 bottles with a directly traceable cash outlay cost of 18 cents per bottle. Thus, Lyan has had to purchase 500,000 bottles annuallly. Its present equipment has a maximum capacity of 4,500,000 bottles with a directly traceable cash outlay each. The new equipment would allow Lyan to manufacture its entire annual demand for bottles at a direct-material cost savings of 1.2 cents per bottle. Bair estimates that Lyan's annual bottle demand will continue to be 5,000,000 bottles over the next five years, the estimated life of the special-purpose equipment.
Required: Bair Company's management plans to submit a bid to Lyan Company for the manufacture of the special-purpose bottling equipment.
1. Calculate the bid Bair would submit if it follows its standard pricing policy for special-purpose equipment.
2. Calculate the minimum bid Bair would be willing to submit on the Lyan equipment that would result in the same total contribution margin as planned for the first quarter of 20x1.
3. Suppose Bair has submitted a bid slightly above the minimum calculated in requirement (2). Upon receiving Bair's bid, Lyan's assistant purchasing manager telephoned his friend at Tygar Corporation: “Hey Joe, we just got a bid from Bair on some customized equipment. I think Tygar would stand a good chance of beating it. Stop by the house this evening, and I'll show you the details of Bair's bid and the specifications on the machine.”
Is Lyan Company's assistant purchasing manager acting ethically? Explain.