Bonivo Inc. manufactures computers from commodity components to client specifications. The company has historically tracked only the cost of components to computers, and computer selling prices, or bids, have been based solely on the cost of components plus a markup sufficient to cover the other operating costs. In recent years, the company has encountered increasing price pressure from customers and, as a result, computers have often been sold at less than the full markup price—causing continually decreasing profits for the firm.
As you have provided other financial services to Bonivo Inc. in the past, company management has asked you for guidance regarding approaches that could be taken to better manage the firm’s profits and prices. You decide that a job order costing system could be helpful to Bonivo.
a. Explain how a job order costing system could help Bonivo better control costs and profits.
b. Explain why Bonivo should not base computer prices only on component costs plus a markup.