Chapter 13, Problem 23P

Problem 6-24A Context-sensitive relevance

Continent 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 Continent 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	$800,000	$750,000
Unit-level materials	250,000	220,000
Unit-level labor	260,000	310,000
Unit-level overhead	40,000	30,000
Supervisor’s salary	70,000	70,000
Rental equipment costs	26,000	29,000
Depreciation on tools (zero market value)	19,900	19,900
Allocated portion of companywide facility-sustaining costs	10,400	8,600
Insurance cost for job	18,200	18,200

Required

1. a. Assume that Continent has decided to accept one of the two jobs. Identify the information relevant to selecting one job versus the other. Recommend which job to accept and support your answer with appropriate computations.
2. b. Assume that Job A is no longer available. Continent’s’s choice is to accept or reject Job B alone. Identify the information relevant to this decision. Recommend whether to accept or reject Job B. Support your answer with appropriate computations.

To determine

Identify the information relevant to selecting one job versus the other. Select the appropriate Job based on the relevant information and provide the calculations for the same.

Explanation of Solution

Relevant information: Relevant information is considered as information that can be functional to resolve an issue. This is a specific issue while deciding the configuration and substance of financial statement of an entity, since the best possible design and dimension of detail of data can alter the conclusions of clients with respect to the future bearing of a business.

Decision making: It is a vital capacity in the management, since decision making is identified with issue, a compelling decision making accomplishes the preferred objectives or goals by taking care of such issues.

Determine the contribution to profit for Job A

$\begin{array}{c}Contributionto\mathrm{Pr}ofi{t}_{JobA}=\left[\begin{array}{l}Contract\mathrm{Pr}ice-UnitLevelMaterialCost-\\ UnitLevelLaborCost-UnitLevelOverheadCost-\\ \text{Rental Equipment Costs}\end{array}\right]\\ =\left[\$800,000-\$250,000-\$260,000-\$40,000-\$26,000\right]\\ =\$\text{224,000}\end{array}$

Therefore, the contribution to profit for Job A is $224,000.

Determine the contribution to profit for Job B

$\begin{array}{c}Contributionto\mathrm{Pr}ofi{t}_{JobB}=\left[\begin{array}{l}Contract\mathrm{Pr}ice-UnitLevelMaterialCost-\\ UnitLevelLaborCost-UnitLevelOverheadCost-\\ \text{Rental Equipment Costs}\end{array}\right]\\ =\left[\$750,000-\$220,000-\$310,000-\$30,000-\$29,000\right]\\ =\$\text{161,000}\end{array}$

Therefore, the contribution to profit for Job B is $161,000.

The reasons on identifying the information relevant to selecting one job versus the other are as follows:

The decision with respect to the selection of Job A against Job B, the differential revenue and the avoidable costs that vary between the respective alternatives are relevant. The distributed facility-sustaining cost is not relevant since it is brought about to support companywide actions. These facility-sustaining costs will be incurred irrespective of the job that is accepted and subsequently are not avoidable.

The way that a greater amount of the companywide overhead cost is assigned to one job than another is not relevant since the aggregate companywide overhead cost may not be avoided irrespective of how it is distributed among each job. The supervisor's salary and the insurance protection are not relevant since they do not vary between the alternatives. Depreciation is a sunk cost and is not relevant. These costs will be the equivalent irrespective to which alternative is accepted.

Conclusion

From the results obtained above, Job A gives the higher contribution to profit than Job B, hence it should be accepted.

Therefore, Job A should be accepted.

To determine

Identifying the information relevant to the decision and to recommend whether to accept or reject Job B.

Explanation of Solution

Determine the contribution to profit for Job B

$\begin{array}{c}Contributionto\mathrm{Pr}ofi{t}_{JobB}=\left[\begin{array}{l}Contract\mathrm{Pr}ice-UnitLevelMaterialCost-\\ UnitLevelLaborCost-UnitLevelOverheadCost-\\ \text{Rental Equipment Costs}-SupervisorSalary-\\ Insurance\mathrm{Cos}t\end{array}\right]\\ =\left[\begin{array}{l}\$750,000-\$220,000-\$310,000-\$30,000-\$29,000-\\ \$70,000-\$18,200\end{array}\right]\\ =\$\text{72,800}\end{array}$

Therefore, the contribution to profit for Job B is $72,800.

The reason on identifying the information relevant decision is as follows:

The decision with respect to accepting or rejecting Job B remaining alone, changing the decision setting changes the items that are viewed as relevant. Whereas supervisor's salary and insurance costs will not be avoided by choosing one job over another, they can be avoided by the means of rejecting the two jobs. Consequently, these costs would be relevant to a decision with respect to whether to accept or reject Job B remaining alone.

Conclusion

From the results obtained above, the contribution to profit is positive, Job B should be selected or accepted. This issue delineates the way that the avoidable cost idea is context profound. Under various settings, the relevant items for decision making are diverse. Recognizing relevant items is basically essential for appropriate decision making activities.

Therefore, Job B should be accepted.