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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Is the $600 spent on the basketball tickets relevant to the bid decision? Why or why not?
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