Question

Consider the information in Problem 8-11. Lauden Conference Solutions has decided to adopt an activity-based pricing scheme. On future jobs, the company will charge a 35 percent markup on the sum of product costs plus installer salaries. In addition, the company will charge $300 per change order, $90 per product return for products that are in excellent condition, and $85 per meeting hour with a Lauden conference room designer.
In Problem 8-11, Lauden Conference Solutions specializes in the design and installation of meeting and conference centers for large corporations. When bidding on jobs, the company estimates product cost and direct labor for installers and marks up the total cost by 35 percent. On a recent job for Orvieto Industries, the company set its price as follows:
Product costs including podiums, seating, lighting, etc...... $150,000
Installer salaries...................... 25,000
Total......................... 175,000
Markup at 35 percent.................... 61,250
Bid price......................... $236,250
The job turned out to be a big hassle. Orvieto requested 25 change orders, although the dollar value of the products it requested changed very little. The Company also returned 30 items that had extremely minor flaws (scratches that were barely visible and would be expected in normal shipping). Orvieto also requested seven meetings with designers taking 35 hours before its plan was finalized. Normally, only two or three meetings are necessary.
Nancy Jackson, controller for Lauden, decided to conduct a customer profitability analysis to determine the profitability of Orvieto. She grouped support costs into three categories with the
Following drivers:


Required
a. What would the profit be on the order from Orvieto in Problem 8-11?
b. Identify pros and cons of adopting the activity-based pricing scheme.



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  • CreatedSeptember 23, 2013
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