Question

Frogs, inc. part #1

A commercial company has approached you to design and build the landscape for a new upscale restaurant on the lake. While Frogs Inc. has done some business projects, they have not completed one this elaborate. To keep with the tradition of the natural landscape, the project will not entail paving. Instead, the restaurant wants a clean, natural landscape with lights, plants, and frogs with a gravel parking lot. The owners know that if they can do a great job on this project, they could potentially become the premiere landscape company in the area. Frogs Inc. has worked with the restaurant owners in the past and they were very pleased with the work. In fact, they did not ask any other company for a bid on the job because Frogs Inc. was their first choice for the project. The restaurant owners agreed to pay $27,500 for the landscape and parking lot.

The owners have estimated that the commercial project will take 520 hours to complete. The owners will bill 40 hours of their time, 120 hours to designers, 320 hours to engineers, and 40 hours to concrete casters. Of the engineering hours, 80 hours will be billed to Sr. Engineers for material selection and purchase and 240 hours to Jr. Engineers for material placement. This large project will require more hours than other projects they have completed. The accountants have provided a list of direct materials for the job and other pertinent information as follows:

Direct Materials for this project

Material	units	Cost
Large frog statue	10	$100
Medium frog statue	4	$60
Small frog statue	6	$40
Plants	100	$10
Light poles	20	$50
Path lights	100	25
Gravel	10 ton	$200 ton

Frog Direct Materials

Frog size	yearly total	yearly cost
small	400	19,000
med	350	24,000
large	25	28,000
totals	1,000	$71,000

Wage Rates

owners	$50
designers	$40
Sr. engineer	$30
Jr. Engineer	$25
Concrete Caster	$20

The owners have asked you to estimate the cost of the proposed project. They also want to know if you would recommend this project. Remember, the accounting department has supplied you with the above estimates.

Required:

1. Compute the cost of the parking lot job using $5.62 per direct labor hour as the POHR.

2. Compute the cost of the parking lot job using $0.25 for each dollar spent on direct materials as the POHR.

3. Based on your financial analysis, what is your recommendation for Frogs, Inc. to take the job?

4. Identify non-financial issues. List and explain two potential consequences of accepting the project and two for rejecting the project. Do these consequences change your recommendation for accepting or rejecting the job?

Answer 1

1	Computation of cost of parking lot job using $5.62 per direct labor hour as POHR.
	Cost of Direct Material
	Material	Units	Cost per unit	Total Cost
	Large Frog Statue	10	$100	$1,000
	Medium Frog statue	4	$60	$240
	Small Frog Statue	6	$40	$240
	Plants	100	$10	$1,000
	Light Poles	20	$50	$1,000
	Path Light	100	$25	$2,500
	Gravel	10	$200	$2,000
	Total			$7,980
	Cost of Labor
		Hours	Rate per Hour	Total Cost
	Owner	40	$50	$2,000
	Designers	120	$40	$4,800
	Sr. Engineers	80	$30	$2,400
	Jr, Engineers	240	$25	$6,000
	Concrete Casters	40	$20	$800
	Total	520		$16,000
	Overhead Cost
	Direct labor hours	520
	Predetermined overhead rate	$5.62
	Cost of Overheads	$2,922
	Total cost of the parking lot
	Direct Materials	$7,980
	Direct labor	$16,000
	Overhead cost	$2,922
	Total cost of the parking lot	$26,902
1	Computation of cost of parking lot job using $0.25 per dollar spent on direct material as POHR.
	Cost of Direct Material
	Material	Units	Cost per unit	Total Cost
	Large Frog Statue	10	$100	$1,000
	Medium Frog statue	4	$60	$240
	Small Frog Statue	6	$40	$240
	Plants	100	$10	$1,000
	Light Poles	20	$50	$1,000
	Path Light	100	$25	$2,500
	Gravel	10	$200	$2,000
	Total			$7,980
	Cost of Labor
		Hours	Rate per Hour	Total Cost
	Owner	40	$50	$2,000
	Designers	120	$40	$4,800
	Sr. Engineers	80	$30	$2,400
	Jr, Engineers	240	$25	$6,000
	Concrete Casters	40	$20	$800
	Total	520		$16,000
	Overhead Cost
	Dollar spent on direct material	$7,980
	Predetermined overhead rate	$0.25
	Cost of Overheads	$1,995
	Total cost of the parking lot
	Direct Materials	$7,980
	Direct labor	$16,000
	Overhead cost	$1,995
	Total cost of the parking lot	$25,975
3	Based on the financial analysis, it is recommended to take the job. Under both assumptions
	it is earning profit.
4	Non-financial issues.
a	Frog Inc. has not done this type of project earlier.
b	This project require more hours than other projects they have completed.
	Two potential consequences of accepting the project.
1	Frog Inc. will become premiere landscape company in the area.
2	Frog Inc. will get more projects from the restaurant owner
	Two potential consequences of rejecting the project
1	Frog Inc. will not get this type of landscape projects in future.
2	It will not remain first choice for restaurant owner for any other landscape project.