Cost-plus pricing, different definitions of costs. Wellington Ltd. manufactures bedroom furniture. Its primary customers are hotel chains, and the company manufactures large quantities of products per customer specification. It recently has received a request from Holiday Hotels to bid on a contract to supply a multipurpose cabinet. The cabinet will be designed to house a TV, mini fridge, and coffee maker as well as provide some storage. Holiday Hotels is interested in purchasing 10,000 units for its 50 hotels across Ontario. The estimated manufacturing costs per cabinet are:

Variable selling costs are $4 per unit. The company has determined that fixed administration charges of $25,000 should be allocated to this contract.
REQUIRED 1. Calculate the total cost of this order under each of the following definitions of “cost”:
i. Absorption manufacturing cost ii. Variable manufacturing cost iii. Total variable product cost iv. Total (full) product cost.
2. Calculate the estimated bid prices assuming the following pricing policies:
1. Target contribution per room-night, $38 Pricing Decisions, Product i. 210% of absorption manufacturing cost Profitability Decisions, and Cost ii. 240% of variable manufacturing cost iii. 225% of total variable cost iv. 200% of total cost.
3. Compare your prices calculated in part 2. Under what circumstances would you recommend each of the pricing policies?
LO1

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Direct materials Direct labour, 1.5 hours @ $18 Variable overhead rate Fixed overhead rate $45.00 $27.00 $6 per direct labour hour $8 per direct labour hour