Negotiation-Porto
Seller's Information - Technutronics

Brad Tennant, Sales Manager for Technutronics, was developing a strategy for a
negotiation session to be held with Gerald Stecklen, a buyer at Porto Corporation. Mr.
Stecklen requested the meeting to discuss the quotation submitted by Technutronics for
New Prod, a newly designed component.
Brad's company submitted the quotation for New Prod in response to a request for
quotation of 200,000 units plus a possible follow-on order of up to 200,000 units (Exhibit
1S). Working with the Engineering and Manufacturing staffs, Brad developed an estimate
of manufacturing and tooling costs (Exhibit 2S).
The process required to produce the component was unique and somewhat complex.
Therefore, quality control requirements for the part were quite involved. Furthermore, if
material or equipment problems occurred, an additional $0.60 to $0.70 per unit would be
required to produce the part at a level that satisfied the buyer's requirements. Additional
tooling might also be required beyond the quoted tooling charge of $40,000. However,
Brad wanted to keep tooling charges to a minimum.
The Porto business would be beneficial to Technutronics since they were operating at 75%
capacity. Porto was also a long-time customer. The contract would amount to
approximately $1,000,000 plus a possible addition of $1,000,000 if the additional 200,000
units were realized.
Estimated direct costs to produce the component were $2.71 (raw material + direct
engineering + direct labor) of the $4.68 total cost to produce. Brad wanted to establish a
per unit selling price that would cover all direct costs and significantly contribute to fixed
costs and profit. Furthermore, he needed to consider the quality cost contingencies.
After some discussion by the management committee and a review of estimated costs for
the part, a quotation was agreed upon. The quality cost contingencies were included and
the possible tooling cost increases ignored ($4.68 + $ 0.70). A profit percentage of 10%
was added ($0.54). Brad and his controller decided to quote $5.90 per unit plus $40,000
for tooling. Brad felt this bid to be competitive with other firms.
The manufacturing manager informed Brad he would make additional effort to develop
statistical process control methods to highlight quality problems. Brad realized that the
use of statistical methods could help reduce direct costs over time if Technutronics was
successful in identifying and eliminating the sources of variability within the process. In
addition, there were learning curve considerations for New Prod. However, Brad did not

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include any estimation of learning effects in the bid. Typically, items such as New Prod
have a 90% learning curve.
Brad's task was to develop his negotiation strategy and plan. He knew the contract was
important to Technutronics, but they could not sustain a loss. He also knew that Porto did
not possess the manufacturing capabilities for the part. The company had no option but to
subcontract the component. Brad also knew that other suppliers were anxious for this
business.

Exhibit 1B

Expected New Prod Delivery Schedule
Month Quantity
December 20,000
January 20,000
February 25,000
March 15,000
April 15,000
May 15,000
June 10,000
July 10,000
August 15,000
September 20,000
October 20,000
November 15,000
Total 200,000
Payment terms: Net 25
Transportation Terms: Sellers Plant, Freight Collect
Using Location: Detroit, Michigan

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Exhibit 2S
Sellers Estimated Cost
(For 200,000 Units)

Total Cost Unit Cost
Raw Material: $497,000 $2.488
(0.4405 lbs./unit x $5.648/lb.)
Direct Engineering Labor:
Electrical Engineer
$17.50/hr. x 80 hrs. $ 1,400
Micro Associate Engineer
$11.25/hr x 1200 hrs. $13,500
Micro Technician
$10.50/hr. X 600 hrs. $ 6,300

Engineering Overhead: $21,000 x 125% $26,250 $0.131
Direct Manufacturing Labor:
Machine Shop
$10.65/hr. x 1080 hrs. $11,502
Mechanical Assembly
$6.00/hr. x 2940 hrs. $17,640
Assembly Supervisor
$11.55/hr. x 500 hours $5,775
Production Manager
$14.50/hr. x 500 hours $7,250

Manufacturing Overhead: $42,167 x 250% $105,418 $0.5272

SUBTOTAL $692,885

General and Administrative Costs:
$692,885 x 35% $242,510 $1.2126
TOTAL $935,395 $4.678

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In addition to specific requests by the instructor:
1. Prepare to negotiate a contract with Porto. Identify the key issues and the
range of your position on those issues. Remember that price is not the only
variable subject to negotiation.
2. What do you think will be the most important issue(s) to the buyer?
3. What do you believe is the highest price that Porto is willing to pay for New
Prod? What is the lowest price you are willing to sell New Prod? (This
defines your negotiating range on the price issue).

pur-new-sol

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