What potential problems do you envision with cost-plus pricing?

What potential problems do you envision with cost-plus pricing?

CS102
ANALYZING MANAGERIAL DECISIONS: Rich Manufacturing
Gina Picaretto is production manager at the Rich Manufacturing Company. Each year her unit buys up to 100,000 machine parts from Bhagat Incorporated. The contract specifies that Rich will pay Bhagat its production costs plus a $5 markup (costplus pricing). Currently, Bhagat’s costs per part are $10 for labor and $10 for other costs. Thus the current price is $25 per part. The contract provides an option to Rich to buy up to 100,000 parts at this price. It must purchase a minimum volume of 50,000 parts. Bhagat’s workforce is heavily unionized. During recent contract negotiations, Bhagat agreed to a 30 percent raise for workers. In this labor contract, wages and benefits are specified. However, Bhagat is free to choose the quantity of labor it employs.
Bhagat has announced a $3 price increase for its machine parts. This figure represents the projected $3 increase in labor costs due to its new union contract. It is Gina’s responsibility to evaluate this announcement.
1. Why do many firms use cost-plus pricing for supply contracts?
2. What potential problems do you envision with cost-plus pricing?
3. Should Gina contest the price increase? Explain.
4. Is the increase more likely to be justified in the short run or the long run? Explain.
5. How will a $3 increase in the price of machine parts affect Gina’s own production decisions?

In this case, we are put in the shoes of Gina, who is the production manager at Rich Manufacturing. Gina has just been told that the cost of one of her inputs to production is going to increase from $25 to $28 per part due to an internal labor negotiation that her supplier had with its union. The contract that Gina’s company has agreed to with the counterparty, Bhagat, is a cost-plus contract, which makes Gina’s company liable for the increase. The questions asked in this case are (a) Why do firms use cost-plus pricing, (b) What potential problems do you see with cost plus pricing, (c) Should Gina contest the price increase, (d) Is the increase more likely justified over the short or long-run, and (e) How will the increase in the cost of production affect Gina’s production process.

All questions should be answered for each case study. If calculations would enhance your commentary, it is strongly urged that you include these calculations. The length of a case study is determined by how well you include the requested
information. Succinct, complete answers that show that you have prepared your writing with thought and reflection are preferable to answers that ramble and are not reflective of the course content. A complete, well developed response can be given in one paragraph, several paragraphs or a page depending on the question and your ability to articulate your answer. If it requires more than one page that is acceptable as well. The written assignments will be critiqued on the technical part of your answer, the clarity and logical sequence of your response, and grammar and spelling. You are encouraged to use textbook concepts as you attempt to explain in your own words the
answers to the assignments.

Specific Formatting Instruction
All assignments must be completed as Word documents.
If you do not have Word youcan use Microsoft WordPad and use the rich text format (.rtf extension).All assignments must be prepared in the APA format, including references.
Cover page.Use a single cover page that contains the title of the assignment and
Your name
Margins.
All page margins should be the default margins for your word processing
program. Use only the LEFT margin justification setting.
Page numbering.Please use page numbering for all pages except the cover page.
Spacing/Font.
All papers should be single spaced only (this includes spacing between
paragraphs) and a 12 point font. Direct quotes/ paraphrasing.
Direct quotes and paraphrasing MUST be referenced and cited using APA
guidelines. Although there is no limit on how many citations are in
the paper, there is a limit of 15% for quotations and 25% for unoriginal wording for this
course. When more than one quarter of a paper seems to be unoriginal, it usually
indicates a problem. Even if sources are properly cited and some of the words are
changed, it raises the question of how much original thinking went into the paper. There
is a big difference between starting with a blank page and writing your own thoughts,
and building the paper around quotes, paraphrased sources, and the altered wording of
another author. You are encouraged to use textbook concepts as you attempt to explain
in your own words the answers to the assignments rather than relying heavily on quoted
material. Try to think about how you would explain your answer to someone who has not taken a managerial economics class. High scores on the originality report in Turnitin.com are not just a result of plagiarism; they can also result from an incorrect quotation/citation methodology or from using words that have been rearranged from your sources. If you use someone else’s work you must cite and reference it appropriately.

References.
You must include a separate References page in APA format with each
paper. Any source that is used to develop your paper must be included in this section

"Get 15% discount on your first 3 orders with us"
Use the following coupon
"FIRST15"

Order Now