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 directlabour costs are computed, overhead is added at a rate of 125 per cent of direct labour costs, and 10 per cent 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 20X1 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 to achieve a price of £22,000 on the order.

Transcribed Image Text:

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