Question

Martin Enterprises needs someone to supply it with 148,000 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 $1,880,000 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 $158,000. Your fixed production costs will be $273,000 per year, and your variable production costs should be $9.30 per carton. You also need an initial investment in net working capital of $138,000. If your tax rate is 23 percent and you require a return of 14 percent on your investment, what bid price per carton should you submit?

Answer 1

To calculate the bid price per carton, you need to consider the costs and investment associated with the project, including fixed costs, variable production costs, and initial net working capital. By following the provided steps, the bid price per carton should be $64.40.

To calculate the bid price per carton, we need to consider the costs and investment associated with the project. Here are the steps:

Calculate the total fixed costs over the project's life: $1,880,000 (equipment installation) - $158,000 (salvage value) = $1,722,000.

Calculate the total variable production costs: $9.30 (variable cost per carton) x 148,000 (number of cartons) x 5 (number of years) = $6,499,200.

Calculate the total initial investment in net working capital: $138,000.

Calculate the total cost of the project: Total fixed costs + Total variable production costs + Total initial investment in net working capital = $1,722,000 + $6,499,200 + $138,000 = $8,359,200.

Calculate the required return on investment: $8,359,200 x 14% = $1,169,288.

Determine the bid price per carton: Total cost of the project + Required return on investment = $8,359,200 + $1,169,288 = $9,528,488.

Divide the bid price by the number of cartons: $9,528,488 / 148,000 = $64.43 (rounded to $64.40).