Question

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: Design costs S20,000 70,000 0,000 20,000 Design costs Furniture and artwork Direct labor Delivery and installation Overhead costs Design software Furniture handlin General and administration 8.000 5.200 4.800 Total overhead costs 18,000 Full product costs 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 S600 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 Assume you a member of the cost accounting team. Prepare a memo to the company's CFO, Ricki Flag, discussing the situation and, specifically, the following considerations. Is the $600 spent on the basketball tickets relevant to the bid decision? Why or why not? Evaluate whether Groom's suggestion to Doogan to use the developer's tip is unethical. Groom suggests that if Doogan is willing to use cheaper furniture and artwork, he can achieve a bid of $156,000. The designs have already been reviewed and accepted and cannot be changed without additional cost, so the entire amount of reduction in cost will need to come from furniture and artwork. Would it be unethical for Doogan to reduce the cost of furniture and artwork to arrive at a lower bid? Why or why not? What steps should be taken to resolve this situation? 1. 2. 3.

Answer 1

To,

Ricky Flag

CFO, Instyle Interior Designs

Sub: Bid to decorate 4 model homes

We have completed the analysis of costing based on the reviewed designs which are finalized and below are our original estimates:

Design		$	$
	Design Costs	20000
	Furniture and artwork	70000
	Direct Labour	10000
	Delivery & installation	20000	120000
Overhead costs
	Design software	5200
	Furniture handling	4800
	General and administration	8000	18000
Total Costs			138000
Margin			27600
Price to be Quoted			165600

The money already spent on basketball tickets i.e. $600 is not relevant to the bid decision. The reason being that the expenditure is already incurred and would be a sunk cost. Reason being that, whether or not they make a successful bid for the model homes, the amount of $600 cannot be recovered or saved. Hence this should not be considered at all while taking a bid decision.

Groom has spent $600 out of company's funds to spend on basketball game tickets to get some tip from the developer regarding the pricing. Using the tips obtained to determine bid amount seems unethical in line with the 'Standards of Ethical conduct for Management Accountants".

If the pricing of $156,000 is to be achieved, then the cost needs to come to 156000 x 100/120 = 130,000 and that would mean cutting down the costs by $138000 - 130000 = $8000 for 4 model homes (11.4% of furniture and artwork cost) and this comes to $2000 per model home. This cost cutting has to be done entirely from furniture and artwork.

Reduction of Furniture and artwork cost to achieve a bid of $156,000 is again not ethical, since that would involve using cheap products and intended towards achieving the bid price, which will still tantamount to unethical use of information.

The decision should be left with the management as to the bid pricing. Doogan is supposed to submit his computations in line with his understanding of design and information gathered and the pricing can be left to the management as the business decision.