Question

In: Accounting

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

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

Solutions

Expert Solution

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.


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