Question

The executive education (EE) unit at the Business School of Central State University offers both open-enrollment (anyon 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 eight seminars with 140 participants in total. EE's cost analyst has provided the following differential cost estimates $ 900 110 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 $1,300 3,900 9,800 In addition to the preceding differential costs, EE allocates fixed costs to jobs on a direct-labor-cost basis, at a rate of 7 percent of direct labor costs (excluding setup costs). For example, if direct labor costs are $100, EE would also charge ti job $70 for fixed costs. EE charges clients for its costs plus 30 percent. For the purpose of charging customers, costs e the setup costs plus materials costs plus differential labor costs plus allocated fixed costs. EE has enough excess capac 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 activ 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 fou 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

Answer:

a. Total Cost = Set Up Cost + Material Cost + Differential Direct Labor + Allocated Fixed Costs.

	Formula	1 Seminar	4 Seminars	8 Seminars
Set up Costs		900	900	900
Material Cost	No. of participants * 110	2,200	8,800	15,400
Differetial Direct Labor Cost		1,300	3,900	9,800
Fixed Costs	70 % of Labor Cost	910	2,730	6,860
Total Costs		5,310	16,330	32,960

On the basis of above calculations the required table is provided below:

	1 Seminar	4 Seminars	8 Seminars
No. of participants	20	80	140
Total Costs	5,310	16,330	32,960
Fee(30 % of Total Cost)	1,593	4,899	9,888
Bid (Total Cost + Fee)	6,903	21,229	42,848

b.

	1 Seminar	4 Seminars	8 Seminars
Differential Costs:
Set up Costs	900	900	900
Material Cost	2,200	8,800	15,400
Differetial Direct Labor Cost	1,300	3,900	9,800
Allocated Fixed Costs
Total Differential Costs	4,400	13,600	26,100
Differential Bid	6,903	21,229	42,848
Contribution to profit	2,503	7,629	16,748

c.

	1 Seminar	4 Seminars	8 Seminars
Bid	6,903	21,229	34,278.40
Incremental Costs:
Set up Costs	900	900	900
Material Cost	2,200	8,800	15,400
Differetial Direct Labor Cost	1,300	3,900	9,800
Total Incremental Costs	4,400	13,600	26,100
Contribution to profit	2,503	7,629	8,178.4

Explanation : Bid for 8 seminars = 80% of bid amount calculated earlier = 80% of 42,848 = 34,278.40

c2: I "agree" with EE's director as profit is not the highest for the eight seminars but is the highest for

4 seminars at $ 7,629.

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