Samira, owner and manager of Samira Decoration, has been receiving some complaints from her clients. For example, one of her loyal customers, Zeinab, wanted to know why she was being charged a much higher price for an order that was almost identical to an order she placed last year. Zeinab felt that the price hike was simply not justified.

Although Samira, when responding to Zeinab$$s complaint, blamed the price hike on the rising price of materials, she herself was a bit perplexed and decided to look into the matter. Samira asked her accountant to prepare a report for her summarizing cost and pricing data for the last $3$ years. The accountant presented this information in the following table:

Year $1$ Year $2$ Year $3$

Budgeted Results

Revenue $$2,400,000$ $$2,700,000$ $$2,000,000$

Direct materials $360,000405,000320,000$

Direct labor $720,000810,000650,000$

Variable factory overhead $144,000162,000130,000$

Fixed variable overhead $400,000400,000400,000$

Variable selling and administrative expenses $240,000300,000220,000$

Fixed selling and administrative expenses $200,000180,000200,000$

Actual Results

Revenue $$2,320,000$ $$2,800,000$

Direct materials $380,000430,000$

Direct labor $725,000900,000$

Variable factory overhead $140,000160,000$

Fixed variable overhead $425,000440,000$

Variable selling and administrative expenses $260,000300,000$

Fixed selling and administrative expenses $180,000200,000$

Samira believes that the last few years have been fairly representative of business volume in general. Moreover, Samira believes the average of the direct labor cost for years $1$ and $2$ is a fair estimate of her $$normal$$ volume of business.

Samira next turns her attention to how she prices incoming jobs. When her company receives an order, Samira estimates the direct labor and material costs for the job, and then she applies an overhead amount to the job. Each year, the firm computes a budgeted overhead rate per dollar of direct labor. The company then prepares the order quote by adding direct material costs, direct labor costs, and applied overhead, and a $50\%$ markup on total cost.

Samira retrieves information corresponding to Zeinab$$s order in year $2$ and compares it with the price quote the company prepared for Zeinab for the most recent order in year $3.$ Samira is not an accountant, but she is a good manager and can understand why Zeinab complained.

Required:

$1.$ Compute the total overhead application rates for years $1,2,$ and $3.$

$2.$ Compute the overapplied or underapplied overhead for year $1$ and year $2.$

$3.$ The following information pertains to Zeinab$$s order in year $2,$ and her current order for year $3,$ which is identical to year $2$ order.

Year $2$ Year $3$

Direct materials $$15,000$ $$15,500$

Direct labor $$30,000$ $$32,000$

Compute the price charged for the year $2$ order and the price quoted for the year $3$ order.

$4.$ Do you agree with Zeinab that the price being quoted for her year $3$ order is too high?

$5.$ What should Samira do$?$ Can you suggest an alternative way for Samira to develop her price quotes? Explain.