Question

In: Accounting

8. The executive education (EE) unit at the Business School of Central State University offers both...

8.

The executive education (EE) unit at the Business School of Central State University offers both open-enrollment (anyone can sign up) and custom (designed for a specific client) executive education programs. CSU has just received an inquiry from a prospective client about its prices for leadership seminars. The prospective client wants bids for three alternative activity levels: (1) one seminar with 20 participants, (2) four seminars with 20 participants each (80 participants total), or (3) eight seminars with 140 participants in total. EE’s cost analyst has provided the following differential cost estimates.

Setup costs for the entire job $ 900
Materials costs per participant (brochures, handouts, coffee, lunch, etc.) 150
Differential direct labor costs:
One seminar $ 1,800
Four seminars 7,800
Eight seminars 13,200

In addition to the preceding differential costs, EE allocates fixed costs to jobs on a direct-labor-cost basis, at a rate of 75 percent of direct labor costs (excluding setup costs). For example, if direct labor costs are $100, EE would also charge the job $75 for fixed costs. EE charges clients for its costs plus 20 percent. For the purpose of charging customers, costs equal the setup costs plus materials costs plus differential labor costs plus allocated fixed costs. EE has enough excess capacity to handle this job with ease.

Required:

a. Assume EE’s bid equals the total cost, including fixed costs allocated to the job, plus the 20 percent markup on cost. What should EE bid for each of the three levels of activity?

b. Compute the differential cost (including setup costs) and the contribution to profit for each of the three levels of activity. Note that fixed costs are not differential costs.

c. Assume the prospective client gives three options. It is willing to accept either of EE’s bids for the one-seminar or four-seminar activity levels, but the prospective client will pay only 90 percent of the bid price for the eight-seminar package. EE’s director responds, “We can’t make money in this business by shaving our bids! Let’s take the four-seminar option because we make the most profit on it.”

c-1. What would be the contribution to profit for each of the three options?

c-2. Do you agree with the EE’s director?

Solutions

Expert Solution

a. Total cost = set up cost+material cost+differential direct labor+allocated fixed costs.

Formula 1 seminar 4 seminars 8 seminars
Set up costs 900 900 900
Material cost No. of participants*150   3000 12000 21000
Differential direct labor cost 1800 7800 13200
Fixed costs 75% of labor cost 1350 5850 9900
Total costs 7050 26550 45000

On the basis of the above calculations the required table is provided below:

1 seminar 4 seminars 8 seminars
Number of participants 20 80 140
Total costs 7050 26550 45000
Fee (20% of total cost) 1,410 5,310 9,000
Bid (total cost+fee) 8460 31860 54000

b.

1 seminar 4 seminars 8 seminars
Differential costs:
Set up costs 900 900 900
Materials cost 3000 12000 21000
Differential labor cost 1,800 7800 13200
Allocated fixed costs
Total differential costs 5700 20700 35100
Differential bid 8460 31860 54000
Contribution to profit 2,760 11,160 18900

c.  

1 seminar 4 seminars 8 seminars
Bid 8460 31860 48600
Incremental costs:
Set up costs 900 900 900
Material costs 3000 12000 21000
Differential labor cost 1800 7800 13200
Total incremental costs 5700 20700 35100
Contribution to profit 2,760 11,160 13500

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