The budget for the Oxford University Printing Company for 2011 follows: 

The company typically uses a so-called cost-plus pricing system. Direct materials and direct labour costs are computed, overhead is added at a rate of 125 percent of direct labour costs, and 10 percent of the total cost is added to obtain the selling price. Edith Smythe, the sales manager, has placed a £22,000 bid on a particularly large order with a cost of £5,600 direct material and £6,400 direct labour. The customer informs her that she can have the business for £18,000, take it or leave it. If Smythe accepts the order, total sales for 2011 will be £1,118,000. Smythe refuses the order, saying, “I sell on a cost-plus basis. It is bad policy to accept orders at below cost. I would lose £2,000 on the job.

The company’s annual fixed overhead is £160,000. 

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

2. Give a short description of a contribution-margin technique to pricing that Smythe might follow. Include a stipulation of the pricing formula that Smythe should routinely use if she hopes to obtain a target operating income of £100,000.

Transcribed Image Text:

Sales £1,100,000 Direct material £280,000 Direct labour 320,000 Overhead 400,000 1,000,000 £ 100,000 Net income