Cost Mgt Inc is a management consulting firm that specialize

Cost Mgt. Inc, is a management consulting firm that specializes in management training programs. In-Line Manufacturing Inc. has approached Cost Mgt. to contract for management training for a one-year period. Last years income statement for Cost Mgt. is as follows: Revenues Costs $360,000 120,000 12,000 24,000 8,400 23,600 14,400 80,000 282.400 $ 77.600 Labor Equipment lease Rent Utilities Supplies Other costs Manager\'s salary Total costs Operating profit To satisty the In-Line contract, another part-time trainer will need to be hired at $42,000. Supplies will increase by 12% and other costs will increase by 15%. In addition, new equipment will need to be lease at a cost of $2,500. a. What are the differential costs that would be incurred if the In-Line contract is signed? 5pts b. If In-Line will pay $55,000 for one year (ie differential revenues), should Cost Mgt Inc., accept the contract? Explain your answer

Solution

a. Differential costs:

1. Cost of another part-time trainer at $42,000.

2. Increase in supplies = 12% of original cost of supplies = 12% of 23,600 = $2,832.

3. Increase in other costs = 15% of the original other costs = 15% of 14,400 = $2,160.

4. Leasing of new equipment = $2,500.

Total differential costs = 42,000+2,832+2,160+2,500

= $49,492

b. Differential revenues = $55,000. As differential revenues of $55,000 is greater than the differential costs of $49,492 Cost Mgt Inc. should accept the contract as it will earn them a differential profit of 55,000 – 49,492 = $5,508.