While John was reviewing the September data, he became concerned about the underapplied manufacturing-overhead. Because he never wanted to lay off an employee, the underapplied manufacturing-overhead was always large in months when business was slow. (John assigned idle workers to general cleanup and repair work, and charged their wages to indirect labor.) Of course, John realized why the underapplied manufacturing-overhead was large. What he was worried about, however, was Mrs. Carson. Mrs. Carson, a neighbor, had stopped by the shop one day in early September to get a price on some cabinets she wanted built. Johns son, Junior. spoke with her. Junior was working in the shop while on summer vacation between his first and second year of graduate business school in Austin. He studied Mrs. Carsons plans, and estimated the cost of building her cabinets to be $1,625. His job-estimation sheet showed the following:

Lumber $590 Finishing materials 75 Direct-labor cost 640 Overhead 320 $1,625

When Junior quoted a price of $1,900 ($1,625 cost plus $275 profit) to Mrs. Carson, she said that she could get the same thing built by Walton Kitchens for $1,500. Furthermore, she informed him, "I would throw the dumb economics books away before I would pay a penny more than $1,500 for book cabinets to store them" Junior simply told her that his best price was $1,900. He explained all about labor, materials, profit, overhead, and competitive capitalism. In addition, he told Mrs. Carson that Walton could not make money on a $1,500 price, and if Walton was really willing to build the shelves for $1,500, she would be stealing from him! Mrs. Carson was very angry when she left. Junior later told his father the whole story, and laughed as he said, "Heck, we can't build stuff that costs $1,625 and sell it at a price of $1,600, let alone $1,500, can we?" At the time, John did not think much about the incident, but he began to wonder whether Junior had learned anything at graduate business school. John became especially concerned when he saw Bob Walton, who said, "Mrs. Carson saved me last month." Walton had just delivered Mrs. Carson 's new cabinets, for which she paid $1,500. John wondered who was right: Junior. or Walton? 1. Write a one paragraph explanation of why Junior was correct in holding to a price of $1,900. Use numbers and be sure to give your reasons why he was right. Defend this position, whether you agree with it or not! 2. Write a one paragraph explanation of why Junior was wrong in holding to a price of $1,900. Use numbers and be sure to give your reasons why he was wrong. Defend this position, whether you agree with it or not! 3. Assuming you are John, what would you tell Junior about the way he handled Mrs. Carson in the Carson negotiation? (One paragraph.