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Brown and Son Ltd. builds custom-made pleasure boats that range in price from $10,000 to $268,560. For the past 30 years, Mr. Brown Sr. has
Brown and Son Ltd. builds custom-made pleasure boats that range in price from $10,000 to $268,560. For the past 30 years, Mr. Brown 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: Direct materials $53,400 Direct labour 83,000 Overhead 24,900 161,300 Plus 20% 32,260_ Selling price $193,560 Estimating total overhead for the year and allocating it at 30% of the direct labour costs determined the overhead costs. If a customer rejected the price and business was slow, Mr. Brown Sr. might be willing to reduce his markup to as little as 5% over the estimated costs. Thus, the average markup for the year was estimated at 16%. Mr. Brown 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. Brown 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 $1,300,000, of which $1,040,000 is fixed and the remainder is variable in direct proportion to direct labour. (a) Assume the customer rejected the $193,560 quotation and also rejected a $169,365 (5% markup) quotation during a slack period. The customer countered with a $160,765 offer. 1. What is the minimum selling price Mr. Brown Sr. could have quoted without reducing or increasing the company's net income? Minimum selling price $ 2. What is the difference in company net income for the year between accepting or rejecting the customer's offer? Difference in company net income $
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