Ethics and pricing. Instyle Interior Designs has been requested to prepare a bid to decorate four model homes for a new development. Winning the bid would be a big boost for sales representative Jim Doogan, who works entirely on commission. Sara Groom, the cost accountant for Instyle, prepares the bid based on the following cost information: Direct costs $ 20,000 Design costs Furniture and artwork 70,000 Direct labor 10,000 20,000 Delivery and installation Overhead costs Design software Furniture handling 5,200 4,800 General and administration 8,000 Total overhead costs 18,000 Full product costs $138,000 Based on the company policy of pricing at 120% of full cost, Groom gives Doogan a figure of $165,600 to submit for the job. Doogan is very concerned. He tells Groom that at that price, Instyle has no chance of winning the job. He confides in her that he spent $600 of company funds to take the developer to a basketball playoff game where the developer disclosed that a bid of $156,000 would win the job. He hadn't planned to tell Groom because he was confident that the bid she developed would be below that amount. Doogan reasons that the $600 he spent will be wasted if Instyle doesn't capitalize on this valuable information. In any case, the company will still make money if it wins the bid at $156,000 because it is higher than the full cost of $138,000.
Ethics and pricing. Instyle Interior Designs has been requested to prepare a bid to decorate four model homes for a new development. Winning the bid would be a big boost for sales representative Jim Doogan, who works entirely on commission. Sara Groom, the cost accountant for Instyle, prepares the bid based on the following cost information: Direct costs $ 20,000 Design costs Furniture and artwork 70,000 Direct labor 10,000 20,000 Delivery and installation Overhead costs Design software Furniture handling 5,200 4,800 General and administration 8,000 Total overhead costs 18,000 Full product costs $138,000 Based on the company policy of pricing at 120% of full cost, Groom gives Doogan a figure of $165,600 to submit for the job. Doogan is very concerned. He tells Groom that at that price, Instyle has no chance of winning the job. He confides in her that he spent $600 of company funds to take the developer to a basketball playoff game where the developer disclosed that a bid of $156,000 would win the job. He hadn't planned to tell Groom because he was confident that the bid she developed would be below that amount. Doogan reasons that the $600 he spent will be wasted if Instyle doesn't capitalize on this valuable information. In any case, the company will still make money if it wins the bid at $156,000 because it is higher than the full cost of $138,000.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Evaluate whether Groom’s suggestion to Doogan to use the developer’s tip is unethical. Would it be unethical for Doogan to reduce the cost of furniture and artwork to arrive at a lower bid? What steps should Doogan and Groom take to resolve this situation?
Transcribed Image Text:Ethics and pricing. Instyle Interior Designs has been requested to prepare a bid to decorate four
model homes for a new development. Winning the bid would be a big boost for sales representative Jim
Doogan, who works entirely on commission. Sara Groom, the cost accountant for Instyle, prepares the bid
based on the following cost information:
Direct costs
$ 20,000
Design costs
Furniture and artwork
70,000
Direct labor
10,000
20,000
Delivery and installation
Overhead costs
Design software
Furniture handling
5,200
4,800
General and administration
8,000
Total overhead costs
18,000
Full product costs
$138,000
Based on the company policy of pricing at 120% of full cost, Groom gives Doogan a figure of $165,600 to
submit for the job. Doogan is very concerned. He tells Groom that at that price, Instyle has no chance of
winning the job. He confides in her that he spent $600 of company funds to take the developer to a basketball
playoff game where the developer disclosed that a bid of $156,000 would win the job. He hadn't planned
to tell Groom because he was confident that the bid she developed would be below that amount. Doogan
reasons that the $600 he spent will be wasted if Instyle doesn't capitalize on this valuable information. In any
case, the company will still make money if it wins the bid at $156,000 because it is higher than the full cost
of $138,000.
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