Part 1: Break-Even Analysis A family-owned business, The Hand Protection Company
ID: 1105033 • Letter: P
Question
Part 1: Break-Even Analysis A family-owned business, The Hand Protection Company, is interested in submitting a bid for a contract to supply 12,544 pairs of heavy-duty gloves per quarter to Ecotopia's Ministry of Agriculture for use by the banmanguava fruit workers during the harvest season. After a recent modernization of its gloves manufacturing plant, during this past quarter this company fulfilled another customer's order for 28,000 pairs of gloves produced at a total cost of $296,800. Additionally, company records show that the Average Fixed Cost at a level of production of 14,000 pairs is $11.20 4 competitors' operations, the Hand Protection Company's management is confident that they stand a very good chance of being awarded the contract by submitting a bid that would be 22.5% higher than their break-even price for each of the 12,544 pair of gloves that the contract stipulates. Assuming that Average Variable Cost remains constant, please calculate this company's bid price.Explanation / Answer
Total cost of producing 28,000 pairs = $296,800
ATC of producing 28,000 pairs = $296,800/28,000 = $10.6
AFC of producing 14,000 pairs = $11.20
TFC of producing 14,000 pairs = AFC * 14,000 = $11.20 * 14,000 = $156,800
TFC remains same whatever be the level of output.
So, TFC of producing 28,000 pairs would also be $156,800 as well.
AFC of producing 28,000 pairs = TFC/28,000 = $156,800/28,000 = $5.6
AVC of producing 28,000 pairs = ATC of producing 28,000 pairs - AFC of producing 28,000 pairs
AVC of producing 28,000 pairs = $10.6 - $5.6 = $5
It is provided that AVC remains constant.
So,
AVC of producing 12,544 pairs = $5
AFC of producing 12,544 pairs = TFC/12,544 = $156,800/12,544 = $12.5
ATC of producing 12,544 pairs = AFC of producing 12,544 pairs + AVC of producing 12,544 pairs
ATC of producing 12,544 pairs = $12.5 + $5 = $17.5
Break even price is the price that is equal to average total cost.
So, break-even price of producing 12,544 pairs is $17.5 per pair as the average total cost of producing 12,544 pairs is also $17.5 as well.
Bid is placed at 22.5% higher than the break-even price.
Calculate the Bid Price -
Bid Price = $17.5 + (0.225 * 17.5) = $17.5 + $3.94 = $21.44
The company's Bid Price is $21.44 per pair.