Pricing Based on Costs—Multiple-Choice: E. Berg and Sons build custom-made pleasure boats, which 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 costs of material, labor, a prorated portion of overhead, and adding 20 percent to these estimated costs. For example, a recent price quotation for boat A was determined as follows:

The overhead figure was determined by estimating total overhead costs for the year and allocating them at 25 percent of direct labor costs. If a customer rejected the price and business was slack, Mr. Berg, Sr., would often be willing to reduce his markup to as little as 5 percent over estimated costs. Thus, average markup for the year is estimated at 15 percent. Mr. Ed Berg, Jr., has just completed a course on pricing and believes the firm could use some of the techniques discussed in the course. The course emphasized the contribution margin approach to pricing, and Mr. Berg, Jr., feels such an approach would be helpful in determining the selling prices of their custom-made boats. Total manufacturing overhead for the year has been estimated at $150,000, of which $90,000 is fixed and the remainder varies in direct proportion to direct labor.

Required:

a. What is the proportion of variable overhead to total overhead used by E. Berg and Sons?

(1) 60 percent. (2) 40 percent. (3) 25 percent. (4) 30 percent.

b. What is the variable overhead rate as a percent of direct-labor dollars?

(1) 25 percent. (2) 30 percent. (3) 10 percent. (4) 15 percent.

c. If E. Berg and Sons accepts a customer's offer of $15,000 for boat A, how much profit (loss) will occur?

(1) ($8.000). (2) $1,200. (3) $800. (4) ($1,500).

d. What is the minimum price that E. Berg and Sons should accept for boat A if they use full costing, that is, allocate fixed costs to each project?

(1) $18,000. (2) $15,750. (3) $15,000. (4) $13,800.

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Direct materials $ 5,000 Direct labor 8,000 Overhead 2,000 $15,000 Plus 20 percent 3,000 Selling price $18,000