CMA Study Group

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

Is the question complete? I doubt. Anyhow, the theory of taking special orders/bids would go like:

1. If firm has idle capacity then whatever opportunity helps them in utilizing idle capacity and as long as it generate CM then it is always better to avoid loosing opportunity altogether.

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considers which may lead to totally different decisions, for example, based on given that it might not be feasible to accept anything less than $375.

Hope this helps.

Original Message:
Sent: 10-03-2015 02:48 PM
From: Roopjit Bhullar
Subject: bid amounts

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

Typos fixed (bold italics are additions):

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considerations which may lead to totally different decisions, for example, based on given question that it might not be feasible for firm to accept anything less than $375.

Original Message:
Sent: 10-03-2015 03:20 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

Is the question complete? I doubt. Anyhow, the theory of taking special orders/bids would go like:

1. If firm has idle capacity then whatever opportunity helps them in utilizing idle capacity and as long as it generate CM then it is always better to avoid loosing opportunity altogether.

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considers which may lead to totally different decisions, for example, based on given that it might not be feasible to accept anything less than $375.

Hope this helps.

Original Message:
Sent: 10-03-2015 02:48 PM
From: Roopjit Bhullar
Subject: bid amounts

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

Is the question complete? I doubt. Anyhow, the theory of taking special orders/bids would go like:

1. If firm has idle capacity then whatever opportunity helps them in utilizing idle capacity and as long as it generate CM then it is always better to avoid loosing opportunity altogether.

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considers which may lead to totally different decisions, for example, based on given that it might not be feasible to accept anything less than $375.

Hope this helps.

Original Message:
Sent: 10-03-2015 02:48 PM
From: Roopjit Bhullar
Subject: bid amounts

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

regarding capacity, the question just says green company operates at a maximum of 80% of practical capacity.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-03-2015 03:20 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

Is the question complete? I doubt. Anyhow, the theory of taking special orders/bids would go like:

1. If firm has idle capacity then whatever opportunity helps them in utilizing idle capacity and as long as it generate CM then it is always better to avoid loosing opportunity altogether.

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considers which may lead to totally different decisions, for example, based on given that it might not be feasible to accept anything less than $375.

Hope this helps.

Original Message:
Sent: 10-03-2015 02:48 PM
From: Roopjit Bhullar
Subject: bid amounts

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

80% means they have 20% idle capacity available for special orders/bids without affecting regular production at zero opportunity cost (assuming everything else remains the same, i.e. ceteris paribus)

Original Message:
Sent: 10-03-2015 03:24 PM
From: Roopjit Bhullar
Subject: bid amounts

regarding capacity, the question just says green company operates at a maximum of 80% of practical capacity.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-03-2015 03:20 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

Is the question complete? I doubt. Anyhow, the theory of taking special orders/bids would go like:

1. If firm has idle capacity then whatever opportunity helps them in utilizing idle capacity and as long as it generate CM then it is always better to avoid loosing opportunity altogether.

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considers which may lead to totally different decisions, for example, based on given that it might not be feasible to accept anything less than $375.

Hope this helps.

Original Message:
Sent: 10-03-2015 02:48 PM
From: Roopjit Bhullar
Subject: bid amounts

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

that makes sense but what does that have to do with the company deciding to picking 280K over the 375K to increase operating income?

Thanks. 

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-03-2015 03:28 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

80% means they have 20% idle capacity available for special orders/bids without affecting regular production at zero opportunity cost (assuming everything else remains the same, i.e. ceteris paribus)

Original Message:
Sent: 10-03-2015 03:24 PM
From: Roopjit Bhullar
Subject: bid amounts

regarding capacity, the question just says green company operates at a maximum of 80% of practical capacity.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-03-2015 03:20 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

Is the question complete? I doubt. Anyhow, the theory of taking special orders/bids would go like:

1. If firm has idle capacity then whatever opportunity helps them in utilizing idle capacity and as long as it generate CM then it is always better to avoid loosing opportunity altogether.

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considers which may lead to totally different decisions, for example, based on given that it might not be feasible to accept anything less than $375.

Hope this helps.

Original Message:
Sent: 10-03-2015 02:48 PM
From: Roopjit Bhullar
Subject: bid amounts

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

280k is a counter offer by customer which helps Green 1) in uses idle capacity, and 2) generating extra CM; a far better option than denying offer (or risk loosing opportunity) by insisting on 375k.

Original Message:
Sent: 10-04-2015 05:24 PM
From: Roopjit Bhullar
Subject: bid amounts

that makes sense but what does that have to do with the company deciding to picking 280K over the 375K to increase operating income?

Thanks. 

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-03-2015 03:28 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

80% means they have 20% idle capacity available for special orders/bids without affecting regular production at zero opportunity cost (assuming everything else remains the same, i.e. ceteris paribus)

Original Message:
Sent: 10-03-2015 03:24 PM
From: Roopjit Bhullar
Subject: bid amounts

regarding capacity, the question just says green company operates at a maximum of 80% of practical capacity.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-03-2015 03:20 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

Is the question complete? I doubt. Anyhow, the theory of taking special orders/bids would go like:

1. If firm has idle capacity then whatever opportunity helps them in utilizing idle capacity and as long as it generate CM then it is always better to avoid loosing opportunity altogether.

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considers which may lead to totally different decisions, for example, based on given that it might not be feasible to accept anything less than $375.

Hope this helps.

Original Message:
Sent: 10-03-2015 02:48 PM
From: Roopjit Bhullar
Subject: bid amounts

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------

Hi,

CM with 280 = 34 as seen above.

CM with 375 = higher number using same VC's. 

unless I am calculating VC for 375 wrong. 

This is why I am not understanding why 280 is preferred. 

Thanks. 

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-04-2015 09:14 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

280k is a counter offer by customer which helps Green 1) in uses idle capacity, and 2) generating extra CM; a far better option than denying offer (or risk loosing opportunity) by insisting on 375k.

Original Message:
Sent: 10-04-2015 05:24 PM
From: Roopjit Bhullar
Subject: bid amounts

that makes sense but what does that have to do with the company deciding to picking 280K over the 375K to increase operating income?

Thanks. 

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-03-2015 03:28 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

80% means they have 20% idle capacity available for special orders/bids without affecting regular production at zero opportunity cost (assuming everything else remains the same, i.e. ceteris paribus)

Original Message:
Sent: 10-03-2015 03:24 PM
From: Roopjit Bhullar
Subject: bid amounts

regarding capacity, the question just says green company operates at a maximum of 80% of practical capacity.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-03-2015 03:20 PM
From: Mohammad Taimur Sheikh
Subject: bid amounts

Is the question complete? I doubt. Anyhow, the theory of taking special orders/bids would go like:

1. If firm has idle capacity then whatever opportunity helps them in utilizing idle capacity and as long as it generate CM then it is always better to avoid loosing opportunity altogether.

2. If plant is already running at full capacity then commitment for special orders/bids will also have opportunity costs considers which may lead to totally different decisions, for example, based on given that it might not be feasible to accept anything less than $375.

Hope this helps.

Original Message:
Sent: 10-03-2015 02:48 PM
From: Roopjit Bhullar
Subject: bid amounts

does anyone have a thought on this question?

thanks.

------------------------------
Canada
------------------------------


Original Message:
Sent: 10-01-2015 02:17 PM
From: Roopjit Bhullar
Subject: bid amounts

Hi,

Green is a builder of machinery. it has received an invitation to bid on the manufacture of machinery for Black company. 

Green submitted a bid to Black in the amount of $375K.

Black countered with 280K. 

which option is preferred?

answer - 

280K

- 66K VC (given)

-120K VC (given)

-48K VC (given)

-12K VC (given)

=34K CM 

Therefore they should pick the offer of 280K because it covers all the incremental VC costs and increases operating profit. 

my question is why didn't they choose the 375K? wouldn't that provide a higher profit?

Thanks. 

 

------------------------------
Canada
------------------------------