Question

Rooney Construction Company is a building contractor specializing in small commercial buildings. The company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and Rooney does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with each job follow.

Cost Category	Job A			Job B
Contract price	$	811,000		$	754,000
Unit-level materials		244,500			215,450
Unit-level labor		249,950			305,500
Unit-level overhead		19,300			14,500
Supervisor’s salary		116,570			116,570
Rental equipment costs		26,200			28,700
Depreciation on tools (zero market value)		20,700			20,700
Allocated portion of companywide facility-sustaining costs		11,100			10,100
Insurance cost for job		17,700			17,700

Required

1. Assume that Rooney has decided to accept one of the two jobs. Fill in the information relevant to selecting one job versus the other. Recommend which job to accept.

2. Assume that Job A is no longer available. Rooney's choice is to accept or reject Job B alone. Fill in the information relevant to this decision. Recommend whether to accept or reject Job B.

Answer 1

Solution: Requirement a.

Relevant costs are the avoidable costs i.e. which are incurred specifically for the job
Cost Category	Job A	Job B
Contract price	$811,000	$754,000
Unit-level materials	$244,500	$215,450
Unit-level labor	$249,950	$305,500
Unit-level overhead	$19,300	$14,500
Supervisor’s salary	$116,570	$116,570
Rental equipment costs	$26,200	$28,700
Depreciation on tools (zero market value)	0	0
Allocated portion of companywide facility-sustaining costs	0	0
Insurance cost for job	$17,700	$17,700
Contribution to profit (loss)	$136,780	$55,580

Company is accept Job A as contribution to profit is higher.

Depreciation is a sunk cost and hence irrelevant. Allocated costs are unavoidable.

Requirement b.

Decision	Job B
Contract price	$754,000
Unit-level materials	$215,450
Unit-level labor	$305,500
Unit-level overhead	$14,500
Rental equipment costs	$28,700
Depreciation on tools (zero market value)	0
Allocated portion of companywide facility-sustaining costs	0
Supervisor’s salary	$116,570
Insurance cost for job	$17,700
Contribution to profit (loss)	$55,580

Company is to accept job B as company's profit is maximising by $55,580.

Depreciation is a sunk cost and hence irrelevant. Allocated costs are unavoidable.

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