XYZ Corporation builds custom-designed machinery. A review of selected data and the company’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, XYZ adds a 25% markup to the total of all factory and 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. XYZ recently received an invitation to bid on the manufacture of some custom machinery for XYZ, Inc. For this project, XYZ’s production accountants estimate the material and labor costs will be $66,000 and $120,000, respectively. Accordingly, XYZ submitted a bid to XYZ in the amount of $375,000. Feeling XYZ’s bid was too high, XYZ countered with a price of $280,000. If XYZ accepted XYZ’s offer, what will be the effect on profit?