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 $ 900 100 Setup costs for the entire job Materials costs per participant (brochures, handouts, coffee, lunch, etc.) Differential direct labor costs: One seminar Four Seminars Eight, seminars $1,200 . 3,500 9,400 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 foued 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 foxed 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 foed costs are not differential costs. C. Assume the prospective client gives three options. It is willing to accept either of EEs bids for the one-seminar or four-seminar activity levels, but the prospective client will pay only 85 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 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

a. Bid price for the contracts

Particulars one seminar four seminar eight seminar

Setup costs for entire job 900 =3600(900*4) =7200(900*8)

Material cost per participant 2000(100*20)    =8000(100*80) =14000(100*140)

labour cost 1200 3500 9400

fixed cost allocation @ 75% of labour cost 900(1200*75%) 2625(3500*75%) 7050(7500*75%)

Total cost 5000 17725 37650

markup 20% 1000 3545 7530

Total price 6000 21270 45180

b. Differential cost

only for the labour cost as there is only change in the labour cost for the change in the activity.

differential cost = - 2300(3500-1200) 5900(9400-3500)

contribution = sales - variable cost 1900[6000-(900+2000+1200) 3775[(21270)-(3600+8000+3500)]/4} 3825{[45180-(7200+14000+9400)]/8}

Contribution margin ratio= contribution / sales =31.67% ( 1900/6000) =71%[3775/(21270/4)] 67.73% [3825/(45180/8)]

C. Contribution to profit for each activity

As per above

c1. = 31.67% = 71% =67.73%

c2.

85 % of the price quoted for the 8 seminar= 45180*85% = 38403

38403 as above is more than the total varible cost (7200+14000+9400) which is a relevant cost for decision making . Also it is more than the total cost for the 8seminar which includes apportioned fixed costs. hence directors view is not tenable. it is benificial to accept the project 8 seminar.

Directors contention that 4 seminar yields more profit than the others is correct as it has higher contribution ratio