Question

Problem 15-39 Cost-Plus Pricing; Bidding (LO 15-3 ,15-10) Skip to question [The following information applies to the questions displayed below.] North American Pharmaceuticals, Inc., specializes in packaging bulk drugs in standard dosages for local hospitals. The company has been in business for seven years and has been profitable since its second year of operation. Don Greenway, Assistant Controller, installed a standard costing system after joining the company three years ago. Wyant Memorial Hospital has asked North American Pharmaceuticals to bid on the packaging of three 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 has indicated that any bid over $0.04 per dose will be rejected. Greenway has accumulated the following information prior to the preparation of the bid. Direct labor $ 29.00 per direct-labor hour (DLH) Variable overhead $ 25.00 per DLH Fixed overhead $ 33.00 per DLH Incremental administrative costs $ 3,300 for the order Production rate 5,000 doses per DLH Problem 15-39 Part 1 Required: 1. Calculate the minimum price per dose that North American Pharmaceuticals could bid for the Wyant Memorial Hospital job that would not reduce the pharmaceutical company’s income. (Round your answer to 3 decimal places.)

Answer 1

The minimum price per dose North American Pharmaceuticals could bid without reducing the company's income is $0.024, taking into account the variable costs, fixed overhead, administrative costs, and a 30% return on the total cost.

Step-by-step explanation:

The minimum price per dose that North American Pharmaceuticals could bid without reducing the company's income can be calculated considering the direct labor and variable overhead costs per dose, the addition of fixed overhead and administrative costs spread over the entire job, and a 30 percent return on the total cost.

First, we calculate the total variable cost per dose:

Direct labor per dose = Direct labor per DLH / Production rate = $29.00 / 5,000 doses per DLH = $0.0058 per dose
Variable overhead per dose = Variable overhead per DLH / Production rate = $25.00 / 5,000 doses per DLH = $0.005 per dose
Total variable cost per dose (TVC) = Direct labor per dose + Variable overhead per dose = $0.0058 + $0.005 = $0.0108 per dose

Next, we allocate the fixed overhead and administrative costs to the total number of doses:

Fixed Overhead for the job = Fixed overhead per DLH * Total DLHs needed = $33.00 * (3,000,000 doses / 5,000 doses per DLH) = $19,800
Administrative costs for the job = $3,300
Total fixed and administrative costs (TFAC) = Fixed Overhead + Administrative costs = $19,800 + $3,300 = $23,100
TFAC per dose = $23,100 / 3,000,000 doses = $0.0077 per dose

Therefore, the total cost per dose (TC) before adding the 30% return is:

TC = TVC + TFAC per dose = $0.0108 + $0.0077 = $0.0185 per dose

Now, we calculate the price per dose including a 30% return on the total cost:

Minimum price per dose = TC * (1 + Return on Total Cost) = $0.0185 * (1 + 0.30) = $0.02405 per dose

Therefore, North American Pharmaceuticals could bid a minimum price of $0.024 per dose to Wyant Memorial Hospital.