Analysis Of Universal Drones, Inc.'s Cost Classificat 006222 ✓ Solved

Analysis Of Universal Drones, Inc.'s Cost Classifications and Pricing Methods

This assignment continues with your analysis of your company, Universal Drones, Inc., and their different types of costs. Being discussed are various cost classifications and volume-based costs. You will finish this assignment by discussing different pricing methods that the government can consider. In order to complete this assignment, refer to the scenario in the Introduction of New Drone Company Assignment where you discussed VectorCal and your company. Write a 2–3 page paper in which you:

Analysis of Universal Drones, Inc.’s Cost Classifications

Analyze and provide examples in detail of the following cost classifications for your company:

  • Reasonable costs
  • Allowable costs
  • Allocable costs

Analysis of volume based costs

Analyze and provide detailed examples of how the following costs change depending on volumes produced by Universal Drones, Inc.:

  • Fixed costs
  • Variable costs
  • Semi-Variable costs

Pricing Analysis by the government

Assuming that a firm fixed price contract will be awarded, discuss the following pricing methods and indicate which one the government will probably choose. Also indicate how your company will ensure that the prices will be reasonable for the government. Remember to provide a rationale for each of these costs

Comparison of proposed prices.

Comparison of market-based prices.

Comparison of prior proposed prices.

Use at least three quality resources in this assignment.

Sample Paper For Above instruction

Introduction

Universal Drones, Inc. operates in a competitive and technologically evolving industry, necessitating rigorous cost analysis and strategic pricing to ensure profitability and compliance with government contracting standards. The company’s cost structure, especially the classification and behavior of costs, significantly influences pricing strategies and bid competitiveness. Understanding cost classifications such as reasonable, allowable, and allocable costs provides insight into compliance and financial efficiency. Simultaneously, assessing volume-based costs like fixed, variable, and semi-variable costs enables better prediction of operational expenses relative to production levels. This paper offers an in-depth analysis of these cost categories and explores pricing considerations the government might employ in awarding fixed-price contracts, focusing on price comparison techniques and ensuring reasonable pricing.

Cost Classifications for Universal Drones, Inc.

Reasonable Costs

Reasonable costs are expenditures that a prudent person would incur under similar circumstances and serve as a critical criterion in government contracting to ensure fiscal responsibility. For Universal Drones, Inc., reasonable costs might include the expenses related to procuring high-quality drone components, such as advanced sensors, that are essential for product performance. For example, purchasing a particular model of GPS modules at a market rate that is consistent with industry standards would qualify as reasonable (Federal Acquisition Regulation [FAR], 2022). The reasonableness is often assessed by market comparison or prior procurement history, ensuring that costs are not inflated due to sole sourcing or supplier monopolies.

Allowable Costs

Allowable costs are those that meet specific criteria set forth by contracting regulations and are permissible for reimbursement or inclusion in pricing proposals. Universal Drones must ensure that costs like employee wages, manufacturer materials, and overhead are allowable under FAR guidelines. For instance, wages paid to drone assembly technicians must be justified as necessary for production and conform to prevailing wage determinations to be deemed allowable (U.S. Government Publishing Office, 2021). Costs that are unnecessary, lavish, or not directly related to the contract work are disallowed, protecting the government's interests from unreasonable expenses.

Allocable Costs

Allocable costs are expenses that can be directly assigned to a specific contract or activity based on a reasonable relationship. For Universal Drones, examples include materials directly used in drone manufacturing or specific design engineering hours dedicated to a particular project. If the company incurs maintenance costs for a shared facility, these can be allocated based on the proportion of space or labor hours attributable to the drone project (FAR, 2022). Proper allocation ensures accurate cost recovery and fair pricing in government contracts.

Volume-Based Costs Analysis

Fixed Costs

Fixed costs are expenses that remain constant regardless of production volume within a relevant range. For Universal Drones, fixed costs include rent for manufacturing facilities, salaried managerial staff, and depreciation of machinery. For example, rent payments of $50,000 per month remain unchanged whether the company produces 100 or 1,000 drones, providing stability in cost calculations but requiring careful assessment for capacity planning (Drury, 2018). As production volume increases, fixed costs per unit decrease, enhancing cost efficiency.

Variable Costs

Variable costs fluctuate directly with production volume. For Universal Drones, variable costs encompass raw materials such as drones' chassis, sensors, and propellers, as well as direct labor hours that scale with output. If the cost of raw materials per drone is $200, producing 100 drones costs $20,000, whereas 1,000 drones will cost $200,000, illustrating this linear relationship (Garrison et al., 2020). Managing variable costs is essential for competitive pricing, especially in high-volume production.

Semi-Variable Costs

Semi-variable (or mixed) costs contain both fixed and variable components. Universal Drones may incur utility costs like electricity; a fixed monthly fee plus additional charges based on usage. For instance, electricity costs might be $2,000 plus $0.05 per drone manufactured. These costs require detailed analysis to accurately allocate expenses across different production volumes and predict profit margins effectively (Horngren et al., 2019).

Pricing Analysis by the Government

Fixed Price Contract and Pricing Methods

Assuming the government awards a firm-fixed-price contract, it relies on precise pricing strategies from the contractor to ensure Cost-Reasonableness and competitiveness. The primary pricing methods include proposal comparison, market-based pricing, and historical price comparison.

Proposal Comparison

Universal Drones would develop detailed cost proposals based on projected expenses, market conditions, and estimated overheads. This method involves internal cost analysis and justifies the proposed price by demonstrating accurate cost accumulation and fair profit margins (Crawford & Di Benedetto, 2020). The company ensures price reasonableness by conducting routine review of industry bid data and adjusting estimates based on actual expenses.

Market-Based Prices

The company compares current market prices for similar drone products, supplier quotes, and industry reports, ensuring that the proposed prices align with prevailing rates. When market prices are lower than estimated costs, Universal Drones can negotiate better supplier deals or optimize manufacturing processes. This comparison helps the government avoid overpayment and promotes fair competition (Liyanage & Taylor, 2023).

Prior Proposed Prices

Reviewing previous pricing proposals submitted for similar projects provides historical context for current bids. For example, past successful bids can serve as benchmarks, provided that costs and market conditions remain relatively consistent. Adjustments are made for inflation or scope changes (Davis et al., 2021). Such comparisons provide a pragmatic basis to validate current pricing strategies.

Ensuring Reasonable Pricing

Universal Drones will ensure that prices are reasonable by maintaining detailed cost accounting records, employing market research, and applying conservative profit margins. Transparency in costing and adherence to FAR guidelines further support price reasonableness. Additionally, the company will prepare for potential audits by the government, providing detailed documentation to justify proposed prices, emphasizing compliance and competitiveness.

Conclusion

Comprehensively understanding cost classifications and volume-based cost behaviors enables Universal Drones, Inc. to develop accurate pricing strategies aligned with government contracting standards. By analyzing reasonable, allowable, and allocable costs, along with fixed, variable, and semi-variable costs, the company can optimize production efficiency and cost recovery. In choosing among pricing methods, the company and government aim to ensure fair, reasonable, and competitive prices through meticulous proposal preparation, market comparisons, and historical data review. Such strategic approaches uphold fiscal responsibility and foster successful procurement relationships in the evolving drone industry.

References

  • Cashin, T., & Hill, C. (2018). Cost management and control in government contracting. Journal of Public Procurement, 18(4), 523-545.
  • Crawford, C. B., & Di Benedetto, C. A. (2020). New product management (12th ed.). McGraw-Hill Education.
  • Davis, S. M., Bingham, C. B., & Smith, J. (2021). Pricing strategies for government contracts. Harvard Business Review, 99(2), 88-97.
  • Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
  • Federal Acquisition Regulation (FAR). (2022). Parts 31.001 – 31.205. U.S. Government Publishing Office.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial accounting (8th ed.). McGraw-Hill Education.
  • Horngren, C. T., Datar, S. M., Rajan, M. V., & Kaznik, R. (2019). Cost accounting: A managerial emphasis (16th ed.). Pearson.
  • Liyanage, S., & Taylor, J. (2023). Market-based pricing in government procurement: Strategies and challenges. International Journal of Procurement & Materials Management, 59(1), 15-29.
  • U.S. Government Publishing Office. (2021). Wage Determinations, Federal Wage System. GPO.gov.

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