Ethics and pricing. Baker, Inc., manufactures ball bearings. Baker is preparing to submit a bid for a new ball bearings order. Greg Lazarus, controller of the Bearings Division of Baker, Inc., has asked John Decker, the cost analyst, to prepare the bid. Baker determines price on the basis of full product costs plus a markup of 10%. Lazarus tells Decker that he is keen on winning die bid and that the price he calculates should be competitive.

Decker prepares the following costs for the bid:

Direct materials costs $48,000 Direct manufacturing labour costs 12,000 Design and parts administration overhead costs 4,800 Production order overhead costs 6,000 Setup overhead costs 6,600 Materials-handling overhead costs 7,800 General and administration overhead costs 10,800 All direct costs and 30% of overhead costs are incremental costs ofthe order.

Lazarus reviews the numbers and says, “As usual, your costs are way too high. You have allocated a lot of overhead costs to this job. You know our fixed overhead is not going to change if we win this order and manufacture the bearings. Ever since we installed this new activity-based costing system, we never seem to be able to come up with reasonable product and job costs. Rework your numbers. You have got to make the costs lower.”

On returning to his office, Decker rechecks his numbers. He knows that Lazarus wants this order because the additional revenue from the order would lead to a big bonus for Lazarus and the senior division managers. Decker wonders if he can adjust the costs downward. Lie knows that if he does not come up with a lower bid, Lazarus will he very upset.

Required 1. Using Baker’s pricing policy and based on Decker’s estimates, what price should Baker bid for the ball bearings order?

2. Calculate the incremental costs of the ball bearings order. Why do you think Decker uses full product costs rather than incremental costs in his pricing'decisions?

3. Evaluate whether Lazarus’s suggestion to Decker to use lower cost numbers is unethical.

Will it he unethical for Decker to change his analysis so that a lower price can be bid?

What steps should Decker take to resolve this situation?