Halifax Pharmaceuticals is a wholesaler that 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. Susan Blackwood, the assistant accountant, installed a standard costing system after joining the company three years ago.
Blaney Children’s Hospital has asked Halifax to bid on the packaging of one million doses of medication at total product cost plus a markup on total cost of no more than 15 per cent. Blaney defines ‘total product 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. Blaney has indicated that any bid more than $0.03 per dose will be rejected.
Blackwood has accumulated the following information prior to the preparation of the bid:
Direct labour ……………………………………..$24 per direct labour hour (DLH)
Variable overhead ………………………………. $12 per DLH
Fixed overhead …………………………………..$20 per DLH
Incremental administrative costs …………………$2000 for the order
Production rate ………………………………….. 2000 doses per DLH
Required:
1. Calculate the minimum price per dose that Halifax Pharmaceuticals could bid for the Blaney job without reducing Halifax’s profit.
2. Calculate the bid price per dose using total product cost and the maximum markup specified by Blaney.
3. Independent of your answer to requirement 2, suppose that the price per dose that Halifax calculated, using the cost-plus criterion specified by Blaney, is greater than the maximum bid of $0.03 per dose allowed by Blaney. Discuss the factors that Halifax Pharmaceuticals should consider before deciding whether or not to submit a bid at the maximum price of $0.03 per dose that Blaney allows.
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