Cost-plus pricing, bidding, corporate social responsibility. Wilson Ltd. manufactures promotional items (pens, mechanical pencils, buttons, etc.). Recently, it has been approached by a large charity to supply 2 million pens. The charity is obligated to receive at least three bids before selecting a supplier. The charity also specifies that the maximum price it will pay is total cost plus 12%. Total cost is defined to include all variable costs of produc- tion and distribution as well as a reasonable allocation of fixed manufacturing and fixed administrative costs. The charity has also indicated that any cost over $1.50 per pen will be rejected. The controller for Wilson has determined the following costs would be applicable to the order:

‘The company will produce the units at a rate of 2,500 units per hour.
REQUIRED 1. Calculate the maximum price the charity will pay for the order.
2. What is the minimum price that Wilson could accept?
3. Independent of your answer to part 1, assume the maximum price under the charity guideline of total cost plus 12% works out to $1.20. The manager of the division points out that the charity is willing to pay $1.50 per pen and argues that any price quoted below $1.50 is “leaving profits on the table.” He argues that Wilson should inflate its costs so that its price under the cost-plus formula will work out to $1.50. Do you agree with the manager?
Fully explain your position.LO1

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Direct material Direct labour Variable overhead Fixed overhead Incremental administrative costs $122 per 100 pens $20 per direct labour-hour $15 per direct labour-hour $18 per direct labour-hour $8,000 per order