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.

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 company-wide facility-sustaining costs		10,400			8,600
Insurance cost for job		18,200			18,200

Required

1. 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.
   
2. 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.

Explanation

a.
With respect to a decision regarding the selection of Job A versus Job B, the differential revenue and the avoidable costs that differ between the alternatives are relevant. The allocated facility-sustaining cost is irrelevant because it is incurred to sustain company-wide operations. These facility-sustaining costs will be incurred regardless of which job is accepted and therefore are not avoidable. The fact that more of the company-wide overhead cost is allocated to one job than another is irrelevant because the total company-wide overhead cost cannot be avoided regardless of how it is allocated between jobs. The supervisor’s salary and the insurance coverage are not relevant because they do not differ between the alternatives. Depreciation is a sunk cost and is irrelevant. These costs will be the same regardless of which alternative is accepted. The relevant information is summarized below:
 

Decision:	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	)
Rental equipment costs		(26,000	)			(29,000	)
Contribution to profit (loss)	$	224,000			$	161,000

Since Job A provides the higher contribution to profit, it should be accepted.

b.
With respect to a decision regarding the acceptance or rejection of Job B standing alone, changing the decision context changes the items that are considered relevant. While supervisor’s salary and insurance costs cannot be avoided by selecting one job over another, they can be avoided by rejecting both jobs. Accordingly, these costs would be relevant to a decision regarding whether to accept or reject Job B standing alone. The relevant information for a Job B only evaluation is shown below:

Decision:	Job B
Contract price	$	750,000
Unit-level materials		(220,000	)
Unit-level labor		(310,000	)
Unit-level overhead		(30,000	)
Rental equipment costs		(29,000	)
Supervisor’s salary		(70,000	)
Insurance cost for job		(18,200	)
Contribution to profit (loss)	$	72,800

Because the contribution to profit is positive, Job B should be accepted. This problem illustrates the fact that the avoidable cost concept is context sensitive. Under different contexts, the relevant items for decision making are different. Identifying relevant items is critically important for proper decision making.

Thanks