Solved: Ethics and pricing Baker Inc is preparing to submit

Ethics and pricing Baker Inc is preparing to submit

Ethics and pricing. Baker, Inc., is preparing to submit a bid for a ball-bearings order. Greg
Lazarus, controller of the Bearings Division of Baker, has asked John Decker, the cost analyst
to prepare the bid. To determine the amount of the bid, Baker’s policy is to mark up the full
costs of the order by 10%. Lazarus tells Decker that he is keen on winning the bid and that the
bid amount he calculates should be competitive.
Decker prepares the following costs for the bid:

All direct costs and 30% of overhead costs are incremental costs of the order.
Lazarus reviews the numbers and says, “Your costs are way too high. You have allocated too
many overhead costs to this order. You know our fixed overhead is not going to change if we
win this order and manufacture the bearings. Rework your numbers. You have got to make the
costs lower.” Decker verifies that his numbers are correct. He knows that Lazarus wants this
order because the additional revenues from the order would lead to a big bonus for Lazarus and
the senior division managers. Decker knows that it he does not come up with a lower bid,
Lazarus will be very upset.
1. Using Baker’s pricing policy and based on Decker’s estimates, calculate the total amount
Baker should bid for the ball-bearings order.
2. Calculate the incremental costs of the ball-bearing order. Why do you think Baker uses full
costs of the order rather than incremental costs in its bidding decisions?
3. Evaluate whether Lazarus’ suggestion to Decker to use lower cost numbers is unethical.
Would it be unethical for Decker to change his analysis so that a lower cost can be calculated?
What steps should Decker take to resolve thissituation?

Ethics and pricing Baker Inc is preparing to submit

ANSWER
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