The budget for the Oxford University Printing Company for 20X1 follows:
The company typically uses a so-called cost-plus pricing system. Direct-material and direct-labor costs are computed, overhead is added at a rate of 115% of direct-labor costs, and 10% of the total cost is added to obtain the selling price.
Edith Smythe, the sales manager, has placed a £23,000 bid on a particularly large order with a cost of £5,300 direct material and £6,200 direct labor. The customer informs her that she can have the business for £16,000, take it or leave it. If Smythe accepts the order, total sales for 20X1 will be £1,144,600.
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 £2,630 on the job.”
The company’s annual fixed overhead is £170,000.
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 to achieve a price of £23,000 on the order.