What amount should free wheels ltd bid for this contract

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Reference no: EM132180096

Question - You are the accountant for Free Wheels Ltd, a tandem bicycle manufacturer that is located in Coffs Harbour and has customers in Australia and the USA. Their estimated current sales volume is 6,000 units per month and based on this level of production, the company has budgeted the following costs and prices per unit: Manufacturing Costs per unit (Based on production of 6,000 units per month) Direct Material Cost $75.00 Direct Labour Cost 35.00 Variable Factory Overhead 10.00 Fixed Factory Overhead 20.00 Total Manufacturing Cost 140.00 Selling & Administrative Costs Variable Selling and Administrative Cost 25.00 Fixed Selling and Administrative Cost 20.00 45.00 Total Cost Per Unit 185.00 Selling Price Per Unit $370.00 Cycle World Ltd is an overseas company that sells bicycles all over the world, with the majority of their market in China and India. They have approached Free Wheels about obtaining a quote for a special one-off order as they would like to purchase 25,000 bikes. As this will be a special order sale, there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred. This order is because their existing supplier has suffered substantial earthquake damage to their premises, but the CEO of Cycle World Ltd also hinted to your CEO that if they are satisfied with the product, this might not be the last deal between the two businesses.

Required: 1. Given this knowledge, what amount should Free Wheels Ltd. bid for this contract in each of the following circumstances:

a) The Free Wheels's annual factory capacity is 100,000 units.

b) The Free Wheels's annual factory capacity is 90,000 units.

2. Assuming that the annual factory capacity is 100,000 units, prepare a report for your CEO explaining your justification for the bid price that you came up with in 1 a) Discuss the possible opportunities and potential disadvantages with accepting this contract with Cycle World. Give both quantitative and qualitative support to your discussion.

Reference no: EM132180096

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