Cost-Based Pricing Decision Jeremy Costa, owner of Costa Cabinets Inc., is prepa

Question

Cost-Based Pricing Decision Jeremy Costa, owner of Costa Cabinets Inc., is preparing a bid on a job that requires dollar1,800 of direct materials, dollar1,600 of direct labor, and dollar800 of overhead. Jeremy normally applies a standard markup based on cost of goods sold to arrive at an initial bid price. He then adjusts the price as necessary in light of other factors (e.g., competitive pressure). Last year's income statement is as follows: Required: Calculate the markup that Jeremy will use. What is Jeremy's initial bid price?

Explanation / Answer

1. Markup =(46300+35600)/130000 = 0.63, or 63%

2. Direct materials $1,800
    Direct labor        1,600
    Overhead               800
    Total cost    $4,200
    Add: Markup        2,646
    Initial bid            $6,846

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