Komoka Enterprises needs someone to supply it with 142,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $942,000 to install the equipment necessary to start production. The equipment will be depreciated at 30% (Class 10), and you estimate that it can be salvaged for $87,000 at the end of the five-year contract. Your fixed production costs will be $437,000 per year, and your variable production costs should be $15.30 per carton. You also need an initial net working capital of $92,000. If your tax rate is 35% and you require a 12% return on your investment, what bid price should you submit? (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
Bid price $ per carton
To determine the bid price that Komoka Enterprises should submit for the contract to supply 142,000 cartons of machine screws per year over the next five years, we need to consider various factors, including initial costs, operating costs, depreciation, salvage value, working capital, taxes, and the required return on investment.
Initial Investment: The initial cost to install the equipment necessary for production is $942,000.
Depreciation: The equipment will be depreciated at a rate of 30% under Class 10. To calculate annual depreciation, we first need to find the depreciation expense:
Annual Depreciation Expense = Initial Cost × Depreciation Rate Annual Depreciation Expense = $942,000 × 30% = $282,600 per year
Salvage Value: The equipment can be salvaged for $87,000 at the end of the five-year contract.
Fixed Production Costs: Fixed production costs are $437,000 per year.
Variable Production Costs: Variable production costs are $15.30 per carton. Since we need to supply 142,000 cartons per year, the annual variable production costs are:
Annual Variable Production Costs = Variable Cost per Carton × Number of Cartons Annual Variable Production Costs = $15.30 × 142,000 = $2,181,600 per year
Working Capital: An initial net working capital of $92,000 is required.
Tax Rate: The tax rate is 35%.
Required Return on Investment: The required return on investment is 12%.
Now, we can calculate the bid price:
Bid Price = (Total Cost + Desired Profit) / Total Units
Total Cost = Initial Investment + Annual Depreciation + Fixed Production Costs + Annual Variable Production Costs + Working Capital
Total Units = Number of Years × Number of Cartons per Year
Let’s calculate the total cost components:
Total Cost = $942,000 + $282,600 + $437,000 + $2,181,600 + $92,000 = $3,935,200
Total Units = 5 years × 142,000 cartons/year = 710,000 cartons
Now, we can calculate the bid price:
Bid Price = ($3,935,200 + (Desired Profit × (1 – Tax Rate))) / 710,000
We need to find the desired profit that will satisfy the required return on investment. The formula for the required return on investment is:
Required Return on Investment = (Net Profit After Tax + Depreciation) / Initial Investment
Rearrange the formula to find Net Profit After Tax:
Net Profit After Tax = (Required Return on Investment × Initial Investment) – Depreciation
Net Profit After Tax = (12% × $942,000) – $282,600 = $94,920 – $282,600 = -$187,680
Now, calculate the desired profit:
Desired Profit = Net Profit After Tax / (1 – Tax Rate)
Desired Profit = -$187,680 / (1 – 0.35) = -$187,680 / 0.65 = -$289,846.15
Now, we can calculate the bid price:
Bid Price = ($3,935,200 + (-$289,846.15 × (1 – 0.35))) / 710,000
Bid Price = ($3,935,200 + (-$188,310.98)) / 710,000
Bid Price = $3,746,889.02 / 710,000
Bid Price ≈ $5.27 per carton
Therefore, Komoka Enterprises should submit a bid price of approximately $5.27 per carton to meet its required return on investment of 12% and cover all costs and taxes over the five-year contract period.
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