Approached by a potential customer

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Reference no: EM131125067

You have been approached by a potential customer who could bring considerable business. She says, "I'd like to find an alternative vendor for my future orders of 5,000/yr., but their pricing to me must be competitive."

Your CFO has supplied you with the following information. Current product standard costs are as follows:

$1,400/unit direct material
$400/unit direct labor
$200/unit variable overhead
$200/unit fixed overhead (this figure is the result of budgeted fixed overhead of $2,000,000 and budgeted sales volume of 10,000 units)

1. What is the lowest possible price you could offer to this potential customer (You know that we have sufficient capacity, without working overtime and without adding any new equipment, to make this order)? Please show the calculations.

2. You have been considering investing in automation to eliminate some factory labor if you get this large order. This technology advancement will cost an added $100,000/yr. to lease (net of taxes), but it will reduce labor cost/unit on the customer's units by 50%. How would this change the lowest possible price you could offer to this potential customer and at least still break even? Please show the calculations.

I have calculations. Is it cheaper for you to check mine and correct them or do new ones?

Reference no: EM131125067

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