Justin Manufacturing Which Produces Electrical Components

Justin Manufacturing Which Produces Electrical Components Is Contemp

Justin Manufacturing, which produces electrical components, is contemplating submitting a bid for 30,000 units of Item No. 54. The bid's cost will be as follows: Raw materials $75,000, Direct labor $120,000, Manufacturing overhead $150,000, Additional set-up costs $3,000, Special device $5,000, Allocated administrative overhead $12,000, totaling $365,000. The special device will be purchased for this job, and once the job is completed, the device will be discarded. Justin applies total manufacturing overhead of $5 to each unit, based on 0.5 machine hours at $10 per hour. The overhead rate is based on budgeted yearly fixed overhead of $1,440,000 and an anticipated volume of 480,000 machine hours (40,000 per month). Justin is currently operating at 85% of capacity, and the client needs the order in two months.

Paper For Above instruction

Assessment of Capacity and Cost Considerations for Justin Manufacturing’s Bid

Justin Manufacturing’s decision to submit a bid for 30,000 units necessitates a thorough analysis of its current capacity utilization, cost structure, and ability to meet the delivery deadline. This paper examines whether the company has excess capacity, the minimum cost basis for bidding, the feasibility of producing within the desired timeframe, and the strategic implications of bid pricing in a financially constrained context.

Evaluation of Capacity Utilization

Justin Manufacturing operates at approximately 85% capacity, implying that it is currently utilizing the majority of its productive resources. Capacity utilization at this level indicates limited available excess capacity. Since full capacity would be approximately 40,000 machine hours per month (or 80,000 hours in two months), at 85% capacity, the company is using about 34,000 hours monthly (or 68,000 hours over two months). Given that the order for 30,000 units might require approximately 15,000 machine hours (assuming 0.5 hours per unit), this suggests that Justin is capable of meeting the order within its existing capacity, provided that the current utilization does not include any planned downtimes or maintenance schedules. Therefore, it appears that the current operating environment does not have excess capacity, but rather operates near maximum utilization, leaving limited flexibility for additional jobs without adjusting schedules.

Cost Basis for the Bid Under Excess Capacity Conditions

If Justin had excess capacity—meaning it could produce additional units without incurring significant additional fixed costs—the minimum bid should be based on variable costs plus any additional relevant costs. The variable costs per unit include raw materials, direct labor, and variable overhead. From the provided data, total variable costs are:

• Raw materials: $75,000
• Direct labor: $120,000
• Manufacturing overhead: $150,000 (allocated, but assuming relevant for incremental cost)

Given that total cost is $365,000 for 30,000 units, the per-unit cost is approximately $12.17. However, since the overhead is calculated based on a predetermined rate of $5 per unit, and the special device cost is a one-time expenditure for this job, the marginal cost for additional units primarily involves raw materials, direct labor, and variable overhead. Therefore, the lowest viable bid would be at least the variable costs plus a contribution margin to cover fixed costs, thus ensuring profitability. A conservative estimate might be around $12 to $15 per unit, considering potential incremental costs, which corresponds to a total bid of approximately $360,000 to $450,000 for 30,000 units.

Feasibility of Producing in the Two-Month Timeframe

Given that Justin is operating at 85% capacity, and assuming normal productivity levels, the company can likely meet a two-month deadline for the 30,000 units. Production scheduling must be carefully planned to ensure that the required number of units is completed in the allotted time. Since the total machine hours required for the order, assuming 0.5 hours per unit, totals 15,000 hours, this is within the available capacity over two months, considering the current utilization rate. Additional considerations include the availability of raw materials, efficient scheduling of machine time, workforce management, and the acquisition of the special device to avoid delays. If these elements are well-managed, Justin can produce and deliver the order within the specified period.

Implications of Bid Strategies Under Financial Constraints

Approaching a bid with a low price can attract the client and potentially secure the order, which might be beneficial for a company in marginal financial health seeking to improve cash flow or market share. However, a low bid risks covering only variable costs or worse, leading to losses if fixed costs are not adequately allocated or recovered. It also risks setting a precedent for underpricing future bids.

Conversely, a high bid may ensure profitability per unit but could reduce competitiveness, especially if competitors offer lower prices. This approach might also limit the volume of orders received, further affecting revenue potential and operational capacity utilization. For a financially fragile company, balancing risk and opportunity is crucial; it must consider incremental costs, potential for future volume, and strategic positioning. An optimal approach might involve setting a bid that covers variable costs and a portion of fixed costs, ensuring incremental profitability while remaining competitive.

In summary, the bid decision should align with Justin Manufacturing’s capacity, cost structure, and strategic financial objectives—carefully balancing short-term gains versus long-term viability.

Conclusion

Overall, Justin Manufacturing operates near full capacity, making it essential to assess whether additional production can be absorbed without significant disruption. The cost analysis indicates that bids should cover variable costs and contribute to fixed costs to ensure profitability. The capacity to meet the delivery schedule is feasible, assuming effective planning. Finally, bid strategy must be carefully crafted, especially given the company's financial health, to avoid underbidding or overpricing, which could adversely affect profitability and market positioning.

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