Travel Accessories Company manufactures and sells various travel accessories. The budget for the company for 2021 is as follows:

The company typically uses a cost-plus pricing system. Direct materials and direct labor costs are computed, and overhead is added at 115% of direct-labor costs. A 20% of the total cost is added to obtain the selling price. 

Amelia Baker, the sales manager of the company, has placed a £57,500 bid on a particularly large order. The order will cost £13,250 for direct materials and £15,500 for direct labor. The customer is, however, ready to pay only £40,000 for the order. If Amelia accepts the order, the total sales of the company will be £3,118,500. 

Amelia refuses the order as she thinks accepting orders at below cost while the company is following a cost-plus pricing system would not be appropriate. According to her, the company will lose £6,575 on the order.

The company’s annual fixed overhead is £425,000. 

1. What would the operating income have been with the order? Without the order? Show your calculations. 

2. Give a short description of a contribution margin technique to pricing that Amelia might follow to achieve a price of £57,500 on the order.

Transcribed Image Text:

Sales Direct materials Direct labor Overhead Net income £737,500 850,000 977,500 £3,078,500 2,565,000 £ 513,500