Question

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	$	530
Materials costs per participant (brochures, handouts, coffee, lunch, etc.)		120
Differential direct labor costs:
One seminar	$	1,100
Four seminars		4,500
Eight seminars		8,100

In addition to the preceding differential costs, EE allocates fixed costs to jobs on a direct-labor-cost basis, at a rate of 80 percent of direct labor costs (excluding setup costs). For example, if direct labor costs are $100, EE would also charge the job $80 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?

	Disagree
	Agree

Answer 1

Part A

	One seminar	Four seminars	Eight Seminars
Number of participants	20	80	140
Set up costs	530	530	530
Materials costs per participant	2400 (20*120)	9600 (80*120)	16800 (140*120)
Differential labor costs	1100	4500	8100
Allocated fixed costs (80% of direct labor costs)	880 (1100*80%)	3600 (4500*80%)	6480 (8100*80%)
Total costs	4910	18230	31910
Fees (20% of total costs)	982 (4910*20%)	3646 (18230*20%)	6382 (31910*20%)
Bid	5892	21876	38292

Part B

	One seminar	Four seminars	Eight Seminars
Number of participants	20	80	140
Differential costs:
Setup costs	530	530	530
Materials costs	2400	9600	16800
Differential labor costs	1100	4500	8100
Allocated fixed costs
Total Differential costs	4030	14630	25430
Differential bid	5892	21876	38292
Contribution profit	1862	7246	12862

Part C-1

	One seminar	Four seminars	Eight Seminars
Bid	5892	21876	34463 (38292*90%)
Incremental costs:
Set up costs	530	530	530
Materials costs	2400	9600	16800
Differential labor costs	1100	4500	8100
Total incremental costs	4030	14630	25430
Contribution profit	1862	7246	9033

Part c-2

Disagree. The contribution to profit is greatest for eight seminars.