Question

Problem 8-11

Ceradyne Conference Solutions specializes in the design and installation of meeting and conference centers for large corporations. When bidding on jobs, the company estimates product cost and direct labor for installers and marks up the total cost by 30 percent. On a recent job for Orvieto Industries, the company set its price as follows:

Product costs including podiums, seating, lighting, etc.		$171,100
Installer salaries		23,700
Total		194,800
Markup at 30 percent		58,440
Bid price		$253,240

The job turned out to be a big hassle. Orvieto requested 27 change orders, although the dollar value of the products it requested changed very little. The company also returned 35 items that had extremely minor flaws (scratches that were barely visible and would be expected in normal shipping). Orvieto also requested seven meetings with designers taking 37 hours before its plan was finalized. Normally, only two or three meetings are necessary.

Alison Jackson, controller for Ceradyne, decided to conduct a customer profitability analysis to determine the profitability of Orvieto. She grouped support costs into three categories with the following drivers:

Driver		Annual Value of Driver		Annual Cost
Change orders		810 change orders		$194,400
Number of returns		1,100 product returns		78,100
Design meeting hours		1,380 meeting hours		81,420

Calculate the indirect service costs related to the job performed for Orvieto Industries.

Change orders		$
Returns
Design hours
Total		$

Answer 1

Step 1: Calculate Cost Per Change Order, Per Return and Per Design Meeting Hour

The cost per change order, per return and per design meeting hour is calculated as below:

Driver	Annual Cost (A)	Annual Value of Driver (B)	(A/B)
Change Orders	194,400	810	240	per change order
Number of Returns	78,100	1,100	71	per return
Design Meeting Hours	81,420	1,380	59	per design meeting hour

______

Step 2: Calculate Indirect Service Costs Related to the Job Performed for Orvieto Industries

The indirect service costs related to the job performed for Orvieto Industries are arrived as follows:

Change Orders (27*240)	$6,480
Returns (35*71)	$2,485
Design Hours (37*59)	$2,183
Total	$11,148