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Relevant Costing, Short-Run Decision Making and Special Orders

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I need help with the following problem and developing an executive summary to present.

Primus is a firm of consultants that focuses on process reengineering and quality improvement initiatives. Northwood Industries has asked Primus to conduct a study aimed at improving on-time delivery. Normal practice for Primus is to bill for consultant time at standard rates plus actual travel costs and estimated overhead. However, Northwood has offered a flat $75,000 for the job. Currently, Primus has excess capacity so it can take on the Northwood job without turning down other business and without hiring additional staff. If normal practices were followed, the bill would be:

Overhead (computer costs, rent, utilities, paper, copying, etc.) is determined at the start of the year by dividing estimated annual overhead costs ($2,400,000) by total estimated nonpartner hours (80,000 hours). Approximately 20 percent of the total amount is variable costs. All Primus employees receive a fixed wage (i.e., there is no compensation for overtime). Annual compensation in the previous year amounted to the following:

What will be the effect on company profit related to accepting the Northwood Industries job? What qualitative factors should be considered in the decision whether to accept the job or not?

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Solution Preview

Hi there! Below is my response to your posting. As I previously commented, there are a few key items I don't see in this problem that would help give a quantitative answer. Per the posting, I don't see what the standard consulting rate is or the number of hours estimated for the job. In addition, we don't know if travel is expected, and if so, how much. The problem may be written this way by design, but just wanted to put that out there in case you did have further detail you can add to the post.

Fixed costs in this problem can also be considered sunk costs, which mean the costs would be incurred whether or not the job is taken. Therefore, they should not be considered when making the decision whether or not to take the job. In contrast, variable costs should be considered when ...

Solution Summary

This solution provides a discussion of relevant costing, short-run decision making and special orders.

See Also This Related BrainMass Solution

Herrestad Company Special order for product C

Differential analysis involves knowing which costs are relevant, i.e. future costs that vary among alternatives. It is important to know what information to use and not just how to execute the analysis.

Herrestad Company receives an offer to make a new product, called C, for a new customer. The customer wants to buy 1,000 units. Product C has the same cost structure as product B with three exceptions. The new customer is only willing to pay $150 per unit, direct materials costs will decrease by $12 per unit and Herrestad does not have to incur any variable selling and administrative expenses.

Make a list of the expenses and amounts that are relevant for this decision. How much with the sale of this product contribute to the profitability of Herrestad?
What if the company only pays $140 per unit? How does this change the contribution towards profitability?
If you were the manager, would you accept this order? What considerations, other than financial would enter into your decision?


Current Costs of Product B: (see attached for better formatting of tables)

Product B
Sales $ 300.00
Variable costs:
direct material $ 120.00
direct labor $ 60.00
variable overhead $ 40.00
variable selling and admin $ 10.00
contribution margin $ 70.00

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