Question

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
a. Assume that Continent has decided to accept one of the two jobs. Fill in the information relevant to selecting one job versus the other. Recommend which job to accept.
b. Assume that Job A is no longer available. Continent's choice is to accept or reject Job B alone. Fill in the information relevant to this decision. Recommend whether to accept or reject Job B.

Answer 1

1. Job A is considered for recommendation

2. Accept B

Step-by-step explanation:

1. We calculate contribution for A and B

For job A

$(800000-250000-260000-40000-26000)

= $224000

For job B

$(750000-220000-310000-30000-29000)

= $161000

We compare the costs of both jobs. A has more contribution compared to B so we consider A.

2. A is no longer available

We add supervisors salary as well as insurance as additional costs

$(750000-220000-310000-30000-29000-70000-18200)

= 72800

The contribution from b is positive so the decision is to accept it.