Explain whether the increase would be more justified

Reference no: EM13214189

Gina Picaretto is production manager at the Rich Manufacturing Company. Each year her unit buys up to 100,000 machine parts from Bhagat Incorpo- rated. 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 Gings responsibility to evaluate this announcement. Do you think Gina should contest the price increase? Any explanation would help because I am not sure how to answer that question. 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?

Reference no: EM13214189

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