The cost breakdown details submitted by Rane Machine Works, a supplier for Caravan Engineering, is reproduced in the table given below. Cost Elements Rane Machine Works (amounts in $) Material 8.00 Direct Labor 8.00 Fixed Overhead (@ 150% of direct labor) Manufacturing Cost (material + direct labor + fixed overhead) General & Administrative Overhead (@ 10% of manufacturing cost) Total Cost (manufacturing cost + general & administrative overhead) Profit (@ 10% of Total Cost) Price (total cost + profit) The supply manager at Caravan Engineering has asked two of his supply analysts to estimate the cost details and the cost breakdown given by Rane Machine Works. Supply analyst 1 estimates what the supplier costs should be (using a “should-cost” model), and after analysis, recommends that the supply manager bargain for a price that is based on a 25% reduction in the direct labor cost. Supply analyst 2 takes and estimates the supplier costs as given, and after analysis, recommends that the supply manager bargain for a price that is based on a 25% reduction in the profit. Should the supply manager accept the recommendations of supply analyst 1 or supply analyst 2? Justify your answer with detailed calculations (i.e., see below - complete the table calculations for the cost scenarios leading up to the price, presented by supply analyst 1 and supply analyst 2, and then based on that, justify your choice). Cost Elements Supply Analyst 1 (advocates 25% reduction in direct labor cost) Supply Analyst 2 (advocates 25% reduction in profit) Material 8.00 8.00 Direct Labor Fixed Overhead (@ 150% of direct labor) Manufacturing Cost (material + direct labor + fixed overhead) General & Administrative Overhead (@ 10% of manufacturing cost) Total Cost (manufacturing cost + general & administrative overhead) Profit (@ 10% of Total Cost) Price (total cost + profit)
The cost breakdown details submitted by Rane Machine Works, a supplier for Caravan Engineering, is reproduced in the table given below.
|
Cost Elements |
Rane Machine Works (amounts in $) |
|
Material |
8.00 |
|
Direct Labor |
8.00 |
|
Fixed |
|
|
|
|
|
General & Administrative Overhead (@ 10% of manufacturing cost) |
|
|
Total Cost (manufacturing cost + general & administrative overhead) |
|
|
Profit (@ 10% of Total Cost) |
|
|
Price (total cost + profit) |
|
The supply manager at Caravan Engineering has asked two of his supply analysts to estimate the cost details and the cost breakdown given by Rane Machine Works.
Supply analyst 1 estimates what the supplier costs should be (using a “should-cost” model), and after analysis, recommends that the supply manager bargain for a price that is based on a 25% reduction in the direct labor cost.
Supply analyst 2 takes and estimates the supplier costs as given, and after analysis, recommends that the supply manager bargain for a price that is based on a 25% reduction in the profit.
Should the supply manager accept the recommendations of supply analyst 1 or supply analyst 2?
Justify your answer with detailed calculations (i.e., see below - complete the table calculations for the cost scenarios leading up to the price, presented by supply analyst 1 and supply analyst 2, and then based on that, justify your choice).
|
Cost Elements |
Supply Analyst 1 (advocates 25% reduction in direct labor cost) |
Supply Analyst 2 (advocates 25% reduction in profit) |
|
Material |
8.00 |
8.00 |
|
Direct Labor |
|
|
|
Fixed Overhead (@ 150% of direct labor) |
|
|
|
Manufacturing Cost (material + direct labor + fixed overhead) |
|
|
|
General & Administrative Overhead (@ 10% of manufacturing cost) |
|
|
|
Total Cost (manufacturing cost + general & administrative overhead) |
|
|
|
Profit (@ 10% of Total Cost) |
|
|
|
Price (total cost + profit) |
|
|
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