(SO 2, 4) Use cost-plus pricing to determine various amounts. P9-36A Berg and So
ID: 2514666 • Letter: #
Question
(SO 2, 4) Use cost-plus pricing to determine various amounts. P9-36A Berg and Son Ltd. builds custom-made pleasure boats that range in price from $10,000 to $250,000. For the past 30 years, Mr. Berg Sr. has determined the selling price of each boat by estimating the cost of material, labour, and a prorated portion of overhead, and adding 20% to the estimated costs. For example, a recent price quotation was determined as follows: Direct materials $ 50,000 Direct labour 80,000 Overhead 20,000 150,000 Plus 20% 30,000 Selling price $180,000 Estimating total overhead for the year and allocating it at 25% of the direct labour costs determined the overhead costs. If a customer rejected the price and business was slow, Mr. Berg Sr. might be willing to reduce his markup to as little as 5% over the estimated costs. Thus, average markup for the year was estimated at 15%. Mr. Berg Jr. has just completed a managerial accounting course that dealt with pricing, and he believes that the firm could use some of the techniques discussed in the course. The course emphasized the variable-cost approach to pricing, and Mr. Berg Jr. feels that such an approach would be helpful in determining an appropriate price for the boats. Total overhead, which includes selling and administrative expenses for the year, has been estimated at $1.5 million, of which $900,000 is fixed and the remainder is variable in direct proportion to direct labour. Instructions (a) Assume the customer rejected the $180,000 quotation and also rejected a $157,500 (5% markup) quotation during a slack period. The customer countered with a $150,000 offer. 1. What is the minimum selling price Mr. Berg Sr. could have quoted without reducing or increasing the company's net income? 2. What is the difference in company net income for the year between accepting or rejecting the customer's offer? (b) Identify and briefly explain one advantage and one disadvantage of the variable-cost approach to pricing compared with the approach Berg and Son Ltd. previously used. (a) 2. $12,000 increaseExplanation / Answer
a) 1.
Overheads currently charged by company @25% of direct labour
Here total overheads are $1,500,000 of which $900000 is fixed then $600000 is variable which is 40% of total overhead.
Variable overhead per unit to be charged is = 80000*25%*40%= 8000
Mimimum selling price Mr. Berg could have quoted without reducing or increasing the net income:
=50000+80000+8000= $138000, It is relevant cost for the product which must be charged.
2.) If the order at $ 150000 is accepted than, there is increase in net income by $12000 = 150000-138000
b). Advantage of using Variable Cost approach:
It focuses on first recovering relevant cost of the product than breakeven and then after profit based on the conditions. It is always good to follows this approach as it helps in reducing the cost of product when there is no work or vacant capacity which helps the business to manage sales even in distress conditions.
Disadvantage:
There is the reduction of reported net income. Expensing fixed production costs as a period expense lowers net income for each accounting period
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