Art, Sam, and Kaye (ASK) operates a management consulting firm. It has just received an inquiry from a prospective client about its prices for educational seminars for the prospective client’s supervisors. The prospective client wants bids for three alternative activity levels: (1) one seminar with 25 participants, (2) four seminars with 20 participants each (80 participant’s total), or (3) eight seminars with 144 participants in total. The consulting firm’s accountants have provided the following differential cost estimates:

Startup Costs for the Entire Job.......................................................... $ 600

Materials Costs per Participant (brochures, handouts, etc.)................... 100

Differential Direct Labor Costs:

One Seminar......................................................................................... 1,200

Four Seminars ....................................................................................... 5,000

Eight Seminars ....................................................................................... 8,800

In addition to the preceding differential costs, ASK allocates fixed costs to jobs on a direct labor-cost basis, at a rate of 75 percent of direct labor costs (excluding setup costs). For example, if direct labor costs are $100, ASK would also charge the job $75 for fixed costs.

ASK seeks to make a profit of 20 percent above cost for each job. For this purpose, profit is revenue minus all costs assigned to the job, including allocated fixed costs. ASK has enough excess capacity to handle this job with ease.

a. Assume ASK bases its bid on the average total cost, including fixed costs allocated to the job, plus the 20 percent markup on cost. What should ASK bid for each of the three levels of activity?

b. Compute the differential cost (including startup cost) and the contribution to profit for each of the three levels of activity.

c. Assume the prospective client gives three options. It is willing to accept either of ASK’s bids for the one-seminar or four-seminar activity levels, but the prospective client will pay only 88 percent of the bid price for the eight-seminar package. ASK’s president responds, ‘‘Taking the order for 12 percent below our bid would wipe out our profit! Let’s take the four-seminar option; we make the most profit on it.’’ Do you agree? What would be the contribution to profit for each of the three options?