Question

Farley, Inc., is a manufacturer that produces customized computer components for several well-known computer-assembly companies. Farley’s latest contract with CompWest.com calls for Farley to deliver sound cards that simulate surround sound from two speakers. Farley spent several hundred thousand dollars designing the sound card to meet CompWest.com’s specifications.

 

Farley’s president, Bryon Wilson, has stipulated a pricing policy that requires the bid price for a new job to be based on Farley’s estimated costs to design, manufacture, distribute, and provide customer service for the job, plus a profit margin. Upon reviewing the contract figures, Farley’s controller, Paul York, was startled to find that the cost estimates developed by Farley’s cost accountant, Tony Hayes, for the CompWest.com bid were based on only the manufacturing costs. York is upset with Hayes. He is not sure what to do next.

How did using manufacturing cost only, instead of using all costs associated with the CompWest.com job, affect the amount of Farley’s bid for the job?

Identify the parties involved in Paul York’s dilemma. What are his alternatives? How would each party be affected by each alternative? What should York do next?

Answer 1

Solution Requirement 1 bid should be Farley's pricing policy states that the based on : Design cost & Manufacturing cost + distribution cost + customer Service cost + profit margin Using only manufacturing cost rather than full costs. understates the cost of the job and results in a lower bid price. By excluding the several hundred thousands dollars of design costs, the company may submit a bid price that is too low- If the contract is executed at the current price, Foley's profit margin will be lower than expected, and the company may even incur a loss.

Requirement 2 Assuming that this error will have a significant negative impact on company profits, york will have to discuss the situation with the company president, and he will have to make a recommendation. possible alternatives are i (9) Farley, Inc. will live up to the contract, and absorb the losses in order to maintain good relations with its customer. (6) Farley, Inc. will approach the customer and discuss renegotiating the contract. (c) Farley, Inc. will attempt to use legal tactics to annual the contract. Each party would likely be affected by York's decision: the controller, paul york, may be fired, demoted, 108) in some other way penalized for mot catching the mistake before the contract was signed. On the other hand, he may be able to handle the situation without any negative consequences of the customer is willing to renegotiate.

completest.com would prefer to pay the lowest price and may not want to renegotiate the contract. Compwest.com could sue parley of farley simply refuses to honor the contract. The first thing york should do is to immediately inform the president. It is possible that president may be able to offer other ideas as to how to resolve the satuation.