Reference no: EM132831318

EASTERN COMPONENTS

• Jane Ellen is a new marketing manager at Eastern Components. This company manufactures a variety of pinions, gears and other component parts used by companies around the world. However, their major customer is a west-coast aircraft manufacturer. Currently, Eastern has substantial excess capacity due to production problems at this customer which have, temporarily, reduced demand for Eastern's components. This has had a significant negative effect on profit since Eastern's workers are highly skilled, and the company does not want to reduce head-count during this temporary downturn. To increase demand, Jane has suggested to the vice president of marketing that Eastern lower bids which in the past have averaged 25% above total production cost.
• Jane's boss has suggested that she analysis supporting her suggestion. Last week, Jane received an invitation to bid on a job for Husan Industries, and she has decided to determine whether a "low" bid is warranted for this customer. From the production department, Jane received an estimate that the job will require 2,000 labor hours, 8,000 machine hours and material cost of $178,000. Cost accounting has indicated that the average labor cost is $22 per hour. The cost accounting department indicated that the standard overhead rate is $34 per machine hour. This rate was determined at the start of the year based on an estimate of $23,800,000 of overhead and 700,000 machine hours.
• Jane's went to the cost accounting department and collected data on monthly production overhead and monthly machine hours. Based on regression analysis of these data, Jane estimated that monthly fixed overhead is $1,600,000, and variable overhead is $6 per machine hour.
• Before preparing her analysis, Jane sat down with her boss and they estimated the chances of winning the job from Husan Industries for two different bids. Using the standard approach to costing and bidding on jobs, the company would bid $617,500. At this price the probability of winning the bid is estimated to be approximately 10%. With a bid of $500,000, the probability of winning the bid is estimated to be approximately 50%. With a bid of $400,000, the probability of winning the bid is estimated to be approximately 90%.

Problem 1: Assume you are an intern at Eastern who has been assigned as an aid to Jane Ellen. Analysis showing how Jane arrived at the standard bid of $617,500. Also, Analysis in support of a recommended bid on the Husan Industries job (one of the three bids above). Your analysis should contain key calculations that Jane can use to demonstrate that bids should be lowered (if indeed this is a good idea).