Question

Amazin Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below:

Contract X Contract Z
Contract revenue $200,000 $260,000
Materials 10,000 10,000
Labor 8800 120,000
Depreciation on Equipment 8,000 10,000
Cost incurred for consulting advice 1,500 1,500
Allocated portion of overhead 5,000 3,000

Which of these amounts is relevant for the selection of one contract over another?

a. Contract revenue and cost of materials
b. Materials, consulting advice and allocated overhead
c. Cost of consulting advice and allocated overhead
d. Contract revenue and labor costs

Answer 1

The amounts relevant for the selection of one contract over another are:

d. Contract revenue and labor costs

Step-by-step explanation:

a) Data and Calculations:

Contract X Contract Z Relevant

Contract revenue $200,000 $260,000 Different

Materials 10,000 10,000 Same cost

Labor 8800 120,000 Different

Depreciation on Equipment 8,000 10,000 Fixed costs

Cost incurred for consulting advice 1,500 1,500 Same cost

Allocated portion of overhead 5,000 3,000 Fixed costs

b) The analysis shows that revenues for the two contracts are different and therefore relevant, just like labor costs. However, the costs of materials and consulting advice are relevant, but since they are the same costs, they can be neglected in decision making. Fixed costs are not always relevant for decision making.