Berg and Son Ltd. builds custom-made pleasure boats that range in price from $10,000 to $250,000. For the past 30 years, Mr. Berg Sr. has determined the selling price of each boat by estimating the cost of material, labour, and a prorated portion of overhead, and adding 20% to the estimated costs.
For example, a recent price quotation was determined as follows:

Estimating total overhead for the year and allocating it at 25% of the direct labour costs determined the overhead costs.
If a customer rejected the price and business was slow, Mr. Berg Sr. might be willing to reduce his markup to as little as 5% over the estimated costs. Thus, average markup for the year was estimated at 15%.
Mr. Berg Jr. has just completed a managerial accounting course that dealt with pricing, and he believes that the firm could use some of the techniques discussed in the course. The course emphasized the variable-cost approach to pricing, and Mr. Berg Jr. feels that such an approach would be helpful in determining an appropriate price for the boats.
Total overhead, which includes selling and administrative expenses for the year, has been estimated at $1.5 million, of which $900,000 is fixed and the remainder is variable in direct proportion to direct labour.
Instructions
(a) Assume the customer rejected the $180,000 quotation and also rejected a $157,500 (5% markup) quotation during a slack period. The customer countered with a $150,000 offer.
1. What is the minimum selling price Mr. Berg Sr. could have quoted without reducing or increasing the company's net income?
2. What is the difference in company net income for the year between accepting or rejecting the customer's offer?
(b) Identify and briefly explain one advantage and one disadvantage of the variable-cost approach to pricing compared with the approach Berg and Son Ltd. previously used.

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Direct materials $50,000 80,000 20,000 150,000 30,000 $180,000 Direct labour Overhead Plus 20% Selling price