Cost-plus, time and materials. Mazzoli Brothers is an auto repair shop. Mazzoli’s cost accounting system tracks two cost categories: direct labor (working on the cars) and direct materials (parts). Mazzoli uses a time-and-materials pricing system, with direct labor marked up 100% and direct materials marked up 50% to recover indirect costs of support staff, support materials, and shared machines and tools, and to earn a profit.

Johanna White brings her car to the shop. The head mechanic, Luke Bariess, concludes her car’s problem is with the clutch plate. He considers two options: replace the clutch plate or repair it. The cost information available to Bariess follows:

1. Why might Mazzoli use different markup rates for direct materials and for direct labor?

2. If Bariess presents White with the replace or repair options, what price would he quote for each?

3. If the two options were equally safe and effective for the three years that White intends to use the car before junking it, which option would she choose?

4. If Bariess’s objective is to maximize profits, which option would Bariess recommend to White? Is this the option chosen by White in requirement 3? Comment on your answers in requirements 3 and 4.

Materials $ 40 Labor Repair option Replace option Markup 3.5 hours 1.5 hours $200 100% 50% $30 per labor-hour Labor rate