Problem 10-18 Calculating a Bid Price [LO3] Romo Enterprises needs someone to su

Question

Problem 10-18 Calculating a Bid Price [LO3]

Romo Enterprises needs someone to supply it with 117,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $840,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that, in five years, this equipment can be salvaged for $67,000. Your fixed production costs will be $322,000 per year, and your variable production costs should be $10.00 per carton. You also need an initial investment in net working capital of $72,000. If your tax rate is 30 percent and you require a return of 11 percent on your investment, what bid price should you submit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

The fixed cost of machine attributable per unit = (840000-67000)/(117000*5) = 1.3213 per unit

Fixed production cost per unit =322000/117000= 2.7521 per unit

Variable cost per product = $ 10

Interest cost per unit net of tax = (840000+72000)*11%*(1-0.3)/(117000*5)= 0.12

Total bidding price = 1.3213+ 2.7521+10+0.12= $14.19 per unit.

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