(SO 2, 4) Use cost-plus pricing 30 years, Mr. Berg Sr. has determined the sellin
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(SO 2, 4) Use cost-plus pricing 30 years, Mr. Berg Sr. has determined the selling price of each boat by estimating the cost of material, labour, and a prorated to determine various portion of overhead, and adding 20% to the estimated costs. 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 For example, a recent price quotation was determined as follows: 50,000 80,000 20,000 150,000 30,000 $180,000 Direct materials Direct labour Overhead Plus 20% Selling price 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? (a) 2. $12,000 increase (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.Explanation / Answer
Variable -cost Approach Estimated Overhead $1,500,000.00 Fixed overhead $900,000.00 Variable overhead $600,000.00 Overhead 25% of direct labour cost Direct labour cost (1500000/25%) $6,000,000.00 Per unit direct labour $80,000.00 No. of units 75 variable overhead per unit (600000/No. of units) $8,000.00 variable cost per unit Direct material $50,000.00 Direct labour $80,000.00 overhead $8,000.00 $138,000.00 Total Variable cost (1380000* no. of units) $10,350,000.00 Let selling price be X Net income of the company (15% of total variable cost) $1,552,500.00 75X $11,902,500.00 Minimum Selling price is $158,700.00 Net Income at 20% margin Sales $13,500,000.00 Variable Cost $10,350,000.00 Contribution $3,150,000.00 Less fixed cost $900,000.00 Net Income $2,250,000.00 Net Income at 5% margin Sales $11,812,500.00 Variable Cost $10,350,000.00 Contribution $1,462,500.00 Less fixed cost $900,000.00 Net Income $562,500.00 Net Income(if offer accepted i.e. selling price is 150000) Sales $11,250,000.00 Variable Cost $10,350,000.00 Contribution $900,000.00 Less fixed cost $900,000.00 Net Income $0.00 Advantage of variable cost approach 1) Most appropriate method for determining pricing of the product. It also help in calculating break even point Disadvantage of variable cost approach 1) Variable costing does not assign fixed cost to units of products.
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