Question 3 You are the accountant for FreeWheels Ltd,a tandem bicycle manufacturer that is located in Coffs Harbour andhas customers in Australia and the USA. Their estimated currentsales volume is 6,000 units per month and based on this level ofproduction, the company has budgeted the following costs and pricesper unit: Manufacturing Costs per unit (Based on production of6,000 units per month) Direct Material Cost $75.00 Direct LabourCost 35.00 Variable Factory Overhead 10.00 Fixed Factory Overhead20.00 Total Manufacturing Cost 140.00 Selling & AdministrativeCosts Variable Selling and Administrative Cost 25.00 Fixed Sellingand Administrative Cost 20.00 45.00 Total Cost Per Unit 185.00Selling Price Per Unit $370.00 Cycle World Ltd is an overseascompany that sells bicycles all over the world, with the majorityof their market in China and India. They have approached FreeWheelsabout obtaining a quote for a special one-off order as they wouldlike to purchase 25,000 bikes. As this will be a special ordersale, there will be no costs incurred for variable selling andadministrative costs and no additional fixed costs will beincurred. This order is because their existing supplier hassuffered substantial earthquake damage to their premises, but theCEO of Cycle World Ltd also hinted to your CEO that if they aresatisfied with the product, this might not be the last deal betweenthe two businesses. Required: 1. Given this knowledge, what amountshould FreeWheels Ltd. bid for this contract in each of thefollowing circumstances: a) The FreeWheels’s annual factorycapacity is 100,000 units. b) The FreeWheels’s annual factorycapacity is 90,000 units. (To fulfil the order, you may have topull the product from your regular production). 2. Assuming thatthe annual factory capacity is 100,000 units, prepare a report foryour CEO explaining your justification for the bid price that youcame up with in 1 a). Discuss the possible opportunities andpotential disadvantages with accepting this contract with CycleWorld. Give both quantitative and qualitative support to yourdiscussion.
