CASE STUDY: Rich Manufacturing
Gina Picaretto is production manager at the RichBhagat has announced a $3 price increase for its
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 (cost-
machine parts. This figure represents the projected
plusÿoricinÿ. 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 bu y up to 100,000 pasts at this
price. It must purchase a minimum volume of
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.
$3 increase in labor costs due to its new union
contract. It is Gings responsibility to evaluate this
1. Why do many firms use cost-plus pricing for
2. What potential problems do you envision with
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. Howwill a $3 increase in the price of machine
parts affect Gina’s own production decisions?