Ethics and pricing. Baker, Inc., is preparing to submit a bid for a ball-bearings order. Greg Lazarus, controller of the Bearings Division of Baker, has asked John Decker, the cost analyst to prepare the bid. To determine the amount of the bid, Baker’s policy is to mark up the full costs of the order by 10%. Lazarus tells Decker that he is keen on winning the bid and that the bid amount he calculates should be competitive.

Decker prepares the following costs for the bid:

All direct costs and 30% of overhead costs are incremental costs of the order.

Lazarus reviews the numbers and says, “Your costs are way too high. You have allocated too many overhead costs to this order. You know our fixed overhead is not going to change if we win this order and manufacture the bearings. Rework your numbers. You have got to make the costs lower.” Decker verifies that his numbers are correct. He knows that Lazarus wants this order because the additional revenues from the order would lead to a big bonus for Lazarus and the senior division managers. Decker knows that it he does not come up with a lower bid, Lazarus will be very upset.

1. Using Baker’s pricing policy and based on Decker’s estimates, calculate the total amount Baker should bid for the ball-bearings order.

2. Calculate the incremental costs of the ball-bearing order. Why do you think Baker uses full costs of the order rather than incremental costs in its bidding decisions?

3. Evaluate whether Lazarus’ suggestion to Decker to use lower cost numbers is unethical. Would it be unethical for Decker to change his analysis so that a lower cost can be calculated? What steps should Decker take to resolve this situation?

Direct materials $40,000 Direct manufacturing labor 10,000 Overhead co sts $4,000 Design and parts administration Production order 5,000 Setup 5,500 Materials handling 6,500 General and administration 9,000 Total overhead costs 30,000 $80,000 Full product costs