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	$	900
Materials costs per participant (brochures, handouts, coffee, lunch, etc.)		110
Differential direct labor costs:
One seminar	$	1,300
Four seminars		2,800
Eight seminars		7,900

In addition to the preceding differential costs, EE allocates fixed costs to jobs on a direct-labor-cost basis, at a rate of 70 percent of direct labor costs (excluding setup costs). For example, if direct labor costs are $100, EE would also charge the job $70 for fixed costs. EE charges clients for its costs plus 30 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 30 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 80 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?

Answer 1

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Part a
	One	Four	Eight
	Seminar	Seminars	Seminars
Number of participants	20	80	140
Setup costs	$                    900	$                    900	$                    900
Materials cost (@ $110 per participant)	$                2,200	$                8,800	$              15,400
Differential labor costs	$                1,300	$                2,800	$                7,900
Allocated fixed costs (@70% of direct labor costs)	$                    910	$                1,960	$                5,530
Total costs	$                5,310	$              14,460	$              29,730
Fee (@30% of total costs)	$                1,593	$                4,338	$                8,919
Bid (Total cost plus Fee)	$                6,903	$              18,798	$              38,649
Part b
	One	Four	Eight
	Seminar	Seminars	Seminars
Differential costs:
Setup costs	$                    900	$                    900	$                    900
Materials cost (@ $110 per participant)	$                2,200	$                8,800	$              15,400
Differential labor costs	$                1,300	$                2,800	$                7,900
Allocated fixed costs	$                       -	$                       -	$                       -
Total differential costs	$                4,400	$              12,500	$              24,200
Differential bid	$                6,903	$              18,798	$              38,649
Contribution to profit	$                2,503	$                6,298	$              14,449
Part c
Disagree. The contribution to profit is greatest for eight seminars.
	One	Four	Eight
	Seminar	Seminars	Seminars
Bid (from requirement a, above, @80% for eight seminars)	$                6,903	$              18,798	$              30,919
Incremental costs:
Setup costs	$                    900	$                    900	$                    900
Materials cost (@ $110 per participant)	$                2,200	$                8,800	$              15,400
Differential labor costs	$                1,300	$                2,800	$                7,900
Total incremental costs	$                4,400	$              12,500	$              24,200
Contribution to profit	$                2,503	$                6,298	$                6,719