The executive education unit (EEU) at the Business School of Central University offers both open-enrollment and custom executive education programs. CU has just received an inquiry from a prospective client about its prices for leadership seminars. The prospective client wants bids for three alternative activity levels: (1) one seminar with 20 participants, (2) four seminars with 20 participants each (80 participants in total), or (3) eight seminars with 140 participants in total. EEU’s cost analyst has provided the following differential cost estimates:
In addition to the preceding differential costs, EEU allocates fixed costs to jobs on a direct-laborcost basis, at a rate of 75 percent of direct labor costs (excluding setup costs). For example, if direct labor costs are $100, EEU would also charge the job $75 for fixed costs. EEU charges clients for its costs plus 20 percent. For the purpose of charging customers, costs equal the setup costs plus materials costs plus differential labor costs plus allocated fixed costs. EEU has enough excess capacity to handle this job with ease.
a. Assume EEU’s bid equals the total cost, including fixed costs allocated to the job, plus the 20 percent markup on cost. What should EE bid for each of the three levels of activity?
b. Compute the differential cost (including setup costs) 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 EEU’s bids for the one-seminar or four-seminar activity levels, but the prospective client will pay only 90 percent of the bid price for the eight-seminar package. EEU’s director responds, “We can’t make money in this business by shaving our bids! Let’s take the four-seminar option because we make the most profit on it.” Do you agree? Explain and justify your decision. What would be the contribution to profit for each of the three options?
d. What recommendations can you suggest for modifying EEU’s bidding approach for seminars? Explain and specifically note any advantages and limitations.