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suhad, owner and manager of Suhad Decoration, has been receiving some complaints from her clients. For example, one of her loyal customers, Zeina, wanted to
suhad, owner and manager of Suhad Decoration, has been receiving some complaints from her clients. For example, one of her loyal customers, Zeina, 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. Zeina felt that the price hike was simply not justified. Although Suhad, when responding to Zeina'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. Suhad 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 360,000 405,000 320,000 Direct labor 720,000 810,000 650,000 Variable factory overhead 144,000 162,000 130,000 Fixed variable overhead 400,000 400,000 400,000 Variable selling and administrative expenses 240,000 300,000 220,000 Fixed selling and administrative expenses 200,000 180,000 200,000 Actual Results Revenue $2,320,000 $2,800,000 Direct materials 380,000 430,000 Direct labor 725,000 900,000 Variable factory overhead 140,000 160,000 Fixed variable overhead 425,000 440,000 Variable selling and administrative expenses 260,000 300,000 Fixed selling and administrative expenses 180,000 200,000 Suhad believes that the last few years have been fairly representative of business volume in general. Moreover, Suhad believes the average of the direct labor cost for years 1 and 2 is a fair estimate of her "normal" volume of business. Suhad next turns her attention to how she prices incoming jobs. When her company receives an order, Suhad 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. Suhad retrieves information corresponding to Zeina's order in year 2 and compares it with the price quote the company prepared for Zeina for the most recent order in year 3. Suhad is not an accountant, but she is a good manager and can understand why Zeina complained
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