Price of machine parts affect own production decisions

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Reference no: EM131236661

Please read the following scenario before addressing the question: Gina Picaretto is production manager at the Rich Manufacturing Company. Each year her unit buys up to 100,000 machine parts from Bhagat Incorporated. The contract specifies that Rich will pay Bhagat its production costs plus a $5 markup (cost- plus pricing). Currently, Bhagat's costs per part are $10 for labor and $10 for other costs. Thus the current price is $25 per part. The contract provides an option to Rich to buy up to 100,000 pasts at this price. It must purchase a minimum volume of 50,000 pasts. Bhagat's workforce is heavily unionized. During recent contract negotiations, Bhagat agreed to a 30 percent raise for workers. In this labor contract, wages and benefits are specified. However, Bhagat is free to choose the quantity of labor it employs. Bhagat has announced a $3 price increase for its machine parts. This figure represents the projected $3 increase in labor costs due to its new union contract. It is Ginas responsibility to evaluate this announcement.

Also, how would you explain whether the increase would be more justified in short run or the long run?

And how will a $3 increase in the price of machine parts affect Gina's own production decisions?

Question comes from Managerial economincs and organizational architecture.

Reference no: EM131236661

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