On a full costing basis, no the order should not be sold for $1,500 when it costs $1,625 to make. A. ) I would have not taken the order from Mrs. Cater at the price of $1,500. B. ) I would have not taken the offer because the company would have lost money. When Jack Jr. showed Mrs. Carter the job estimation sheet, it laid out the numbers showing that Lambeth could not do the job for less than $1,625. Right there Lambeth would lose $125 since Mrs. Carter was not willing to pay any more than $1,500, not to mention their $275 profit.
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If the company would have taken the job for $1,500, instead of $1,900, they would have lost a total of $400. C. ) I would take the order at $1,500 only under the conditions that Lambeth would be able to cut enough costs to still be able to make a profit. One way that the company could do this would be to cut costs in areas such as materials. Not only might this make it more affordable to do jobs at a cheaper cost, but it would also help them compete against other companies, like Walworth. Another option would be to cut back on labor.
By possibly purchasing equipment, they could save money on paying actual workers and other labor costs. One last option would be to find a cheaper supplier for materials. They could do this by having supplies bid on the jobs. This is another way to keep Lambeth in competition with other companies. If Lambeth could not comply with these conditions, I would not make the cabinets for anything less than $1,625 just so the company could break even. 5. The business would have been worse off if Lambeth had taken the order at $1,500. Contribution Analysis: Sales$1,500 Less: Variable Costs
Variable Manufacturing Costs($1,305) Variable Selling Administration($0) Contribution Margin$195 Less: Fixed Costs Fixed Selling ($0) Fixed Overhead($320) Operating Profit ($125) As per the contribution analysis, Lambeth would have lost $125 if they would have taken the order at $1,500.
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6. Yes, the business does need to cover its fixed costs. Since fixed costs are required payments remain unchanged when activity level changes, Lambeth should figure out a way to best allocate their resources. The more that the company can produce, the less the fixed cost per unit will be.
This will make it easier to cover the fixed cost per unit, making it more affordable to create cabinets at a cheaper price. 7. If a job generates contribution margin, we can ignore fixed costs for the time being with each individual job, but only if it’s under variable costing. The costs can’t be ignore forever though, they must be covered over a period of time. A. ) The nature of the cost and the way it is allocated does affect my decision. There are two types of costs, variable and fixed, and two ways to allocate costs, variable costing and absorption costing.
Under variable costing, only variable manufacturing overhead is applied to manufacturing goods as a product cost along with direct materials and direct labor. Therefore meaning that under variable costing there will be money there to cover the costs if the company were to do the job for less money. However, under absorption costing, all manufacturing overhead is applied to manufacturing goods. This includes direct labor, direct materials, and manufacturing overhead. Under this method of costing, it would not be financial responsible for the company to take the order at a lesser price.See More on Costs