Question

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.

Answer 1

The estimated average cost per unit is $7.37 after calculating total costs and dividing by the quantity. With the supplier's price at $12 per unit, there is potential for the purchasing department to negotiate a better price based on the calculated costs.

Step-by-step explanation:

To estimate the average cost per unit for the supplier, we first calculate the total cost by adding fixed costs to the total variable costs. The total variable costs are the variable cost per unit multiplied by the quantity, which here would be $7.00 times 150,000 units, equaling $1,050,000. Adding the fixed costs of $55,000 gives us a total cost of $1,105,000. To find the average cost per unit, divide this total cost by the quantity, which results in an average cost of $7.37 per unit.

Considering the supplier's quote of $12 per unit, this price is significantly higher than the estimated average cost of $7.37 per unit. The purchasing department may have room to negotiate a better price, especially if they can determine that the profit margin being sought by the supplier is higher than what the market typically allows for this type of component.