T& W Mechanical sells and services plumbing, heating, and air conditioning systems. T& Ws cost accounting system

T& W Mechanical sells and services plumbing, heating, and air conditioning systems. T& W’s cost accounting system tracks two cost categories: direct labor and direct materials. T& W 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 equipment and tools, and to earn a profit.

During a hot summer day, the T& W central air conditioning in Michelle Lowry’s home stops working. T& W technician Tony Dickerson arrives at Lowry’s home and inspects the air conditioner. He considers two options: replace the compressor or repair it. The cost information available to Dickerson follows:

Required
1. If Dickerson presents Lowry with the replace or repair options, what price would he quote for each?
2. If the two options were equally effective for the 3 years that Lowry intends to live in the home, which option would she choose?
3. If Dickerson’s objective is to maximize profits, which option would he recommend to Lowry? What would be the ethical course ofaction?

Transcribed Image Text:

Repair option Replace option Labor rate Labor 6 hrs 3 hrs. $45 per hour Materials $170 $260