Green Corporation builds custom-designed machinery. A review of selected data and thecompany’s pricing policies revealed the following.
A 10% commission is paid on all sales orders.
Variable and fixed factory overheads total 40% and 20%, respectively, of direct labor.
Corporate administrative costs amount to 10% of direct labor.
When bidding on jobs, Green adds a 25% markup to the total of all factoryand administrative costs to cover income taxes and produce a profit.
The firm’s income tax rate is 40%.The company expects to operate at a maximum of 80% of practical capacity.Green recently received an invitation to bid on the manufacture of some custommachinery for Kennendale, Inc. For this project, Green’s production accountantsestimate the material and labor costs will be $66,000 and $120,000, respectively.Accordingly, Green submitted a bid to Kennendale in the amount of $375,000. FeelingGreen’s bid was too high, Kennendale countered with a price of $280,000. Which one of the following options should be recommended to Green’s management?
A
Accept the counteroffer because the order will increase operating income.
B
Accept the counteroffer even though the order will decrease operating income.
C
Reject the counteroffer even though the order will increase operating income.
D
Reject the counteroffer because the order will decrease operating income.