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Question

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Problem: A manufacturing company is negotiating with a potential supplier for the purchase of 150,000 components. The manufacturer uses reverse pricing analysis to estimate the supplier’s variable costs are $7.00 per unit and that fixed costs, depreciation, overhead, etc., are $55,000. The supplier quotes a selling price at $12 per unit. Calculate the estimated average cost per unit. Do you think the supplier is asking too much for their parts? Could the purchasing department negotiate a better price? Explain your answer.

Explanation / Answer

Solution:

Given in the question

Variable cost =7 per unit

Fixed cost = 55000

No. Of components = 150000

Selling price =12 per unit

So manufacturing company cost per unit = (55000/150000)+7

= 7+0.36666 =7.37 per unit

So estimated average cost per unit is 7.37 per unit.

Yes, supplier is asking too much for their parts.

As we can see the margin per unit is 4.63per unit.

So the purchasing department could negotiate for better price.

As there is good margin for selling department.

So purchasing department could negotiate a better price.

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