Riverview Manufacturing, which produces electrical components, is contemplating submitting a bid for 30,000 units of item no. 54. The bid's cost will be follows:Raw materials$ 75,000Direct Labor120,000Manufacturing overhead 150,000Additional set-up costs3,000Special device5,000Allocated administrative overhead12,000Total cost$365,000The special device will be purchased for this job and once the job is completed, the device will be discarded.Riverview applies total manufacturing overhead of $5 to each unit (0.5 machine hours at $10 per hour). This figure is based, in part, on budgeted yearly fixed overhead of $1,440,000 and an anticipated volume of 480,000 machine hours (40,000 per month). Riverview is presently working at 85% of capacity, and the client needs the order in two
months.Required:A. Is Riverview's current operating environment one of excess capacity or no excess capacity? Briefly explain.B. If Riverview had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the order?C. Can Riverview produce this order in the required time frame of two months? Explain.D. Suppose that Riverview is in marginal financial health. Explain the benefits and problems of approaching the bidding procedure with (1) a low bid or (2) a high bid.
What will be an ideal response?
A. Riverview currently has excess capacity, as it is working at 34,000 machine hours per month (40,000 hours × 85%).
B. Riverview should cover the incremental costs associated with the order, which are computed as follows:
| Raw materials | $ 75,000 |
| Direct Labor | 120,000 |
| Variable manufacturing overhead * | 105,000 |
| Additional set-up cost | 3,000 |
| Special device | 5,000 |
| Total cost | $308,000 |
*Fixed manufacturing overhead is $3 per machine hour ($1,440,000 ÷ 480,000 hours). Thus, variable overhead is $7 per hour ($10 - $3), giving rise to $105,000 (30,000 units × 0.5 hours × $7).
C. No, there is insufficient machine time. Riverview has a 40,000-hour capacity each month and has two months to complete the order. Available machine hours total 12,000 (40,000 × 2 × 15%), and the order requires 15,000 hours (30,000 units × 0.5).
D. A low-bid philosophy will likely translate into additional business, as a firm will probably be successful in its bidding efforts. Unfortunately, if the bids are too low, the firm might not be able to cover its costs. In contrast, a high-bid philosophy will assist a company in covering more of its costs if the company wins the bid. Obviously, there is a greater chance for lost business with this approach. In either case, the marginal financial health of the organization may or may not improve.
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