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The Final Price Adjustment: Defective Pricing

Calculate the amount of the final price adjustment because of defective pricing based on the following:

Contractor unintentionally overpriced their material costs by $75,000 and under-priced their direct manufacturing labor costs by $50,000. Overhead rates used to price the original contract are given below:

Material OH 15%
Engineering OH 75%
Manufacturing OH 124%
Lawn Maintenance OH 1.5%
G & A 24%

Solution Preview

Let us consider that the costs for Material, Engineering, Manufacturing and Lawn Maintenance were originally X, Y, Z and W respectively.

Total Cost Input = (X + 15% of X) + (Y + 75% of Y) + (Z + 124% of Z) + (W + 1.5% of W)
= 1.15X + 1.75Y + 2.24Z + 1.015W

Total Cost = ...

Solution Summary

Solution starts with representing the original costs for Material, Engineering, Manufacturing and Lawn Maintenance by variables and then develops a formula to compute the final price adjustment because of defective pricing.

$2.19