Homework SourseWestside plumbing and heating company is offered a contract
Westside plumbing and heating company is offered a contract for $100,000 to provide plumbing for new building. The labor and equipment costs are calculated to be $60,000 for filling the contract. West side has materials in its inventory to complete the job. The raw materials initially cost the firm $50,000; however the material prices have declined in the interim and now cost only $37,500. Thus if the firm chose not to accept the contract and sells the materials, they would incur a loss of $12,500. Material prices are not expected to go up in the future. Should Westside except the contract. Explain your answer.
Westside plumbing and heating company is offered a contract for $100,000 to provide plumbing for new building. The labor and equipment costs are calculated to be $60,000 for filling the contract. West side has materials in its inventory to complete the job. The raw materials initially cost the firm $50,000; however the material prices have declined in the interim and now cost only $37,500. Thus if the firm chose not to accept the contract and sells the materials, they would incur a loss of $12,500. Material prices are not expected to go up in the future. Should Westside except the contract. Explain your answer.
Solution
Yes, the contract must be accepted as it gives an incremental income of $ 2500 from the contract.
The material cost will be taken as $ 37500 as it is the value which will be realisable and also the value at which it could be reacquired in future.
Hence, Net financial advantage of accepting the contract is as under:
Incremental revenue from contract: $ 100,000
Less: Incremental cost:
Labor and equipment cost $ 60,000
Material cost 37500
Incremental income $ 2500 (net financial advantage)
