Question

I need help with this problem.

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 900 150 Setup costs for the entire job Materials costo per participant (brochures, handouts, coffee, lunch, etc.) Differential direct labor costs: One seminar Four seminars Eight seminars $ 1,800 7,800 13,200 3 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 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?

Answer 1

a.EE bid for each of the three levels of activity

	One seminar	Four seminars	Eight seminars
Number of participants	20	80	140
Setup costs	900	900	900
Materials cost (@ $150 per participant)	3,000	12,000	21,000
Differential labor costs	1,800	7,800	13,200
Allocated fixed costs (@ 75% of direct labor costs)	1,350	5,850	9,900
Total costs	7,050	26,550	45,000
Fee (@ 20% of total costs)	1,410	5,310	9,000
Bid (Total cost plus Fee)	8,460	31,860	54,000

b.Computation of differential cost (including setup costs) and the contribution to profit for each of the three levels of activity.

	One seminar	Four seminars	Eight seminars
Differential bid	8,460	31,860	54,000
Less: Differential costs:
Setup costs	900	900	900
Materials cost	3,000	12,000	21,000
Differential labor costs	1,800	7,800	13,200
Allocated fixed costs
Total Differential costs:	5,700	20,700	35,100
Contribution to profit	2,760	11,160	18,900

c1.Computation of contribution to profit for each of the three options.

	One seminar	Four seminars	Eight seminars
Bid	8,460	31,860	48,600
Less: Incremental costs:
Setup costs	900	900	900
Materials cost	3,000	12,000	21,000
Differential labor costs	1,800	7,800	13,200
Allocated fixed costs
Total Incremental costs:	5,700	20,700	35,100
Contribution to profit	2,760	11,160	13,500

Note:Bid of Eight seminars=54,000*90%=48,600

c2.Disagree. The contribution to profit is greatest for eight seminars.