Jackson Inc. Is A Management Consulting Firm That Specialize

Jackson Inc. is a management consulting firm that specializes in management training programs. Max Manufacturing Inc. has approached Jackson to contract for management training for a one-year period. Last year's income statement for Jackson is as follows: To satisfy the Max contract, another part-time trainer will need to be hired at $44,000. Supplies will increase by 14% and other costs will increase by 16%. In addition, new equipment will need to be leased at a cost of $2,500. a. What are the differential costs that would be incurred if the Max contract is signed? b. If Max will pay $55,000 for one year, should Jackson accept the contract? Explain your answer.

Jackson Inc., a management consulting firm specializing in management training programs, is evaluating a potential contract with Max Manufacturing Inc. The decision involves analyzing the differential costs associated with accepting the contract and determining whether the contract is financially advantageous for Jackson.

Paper For Above instruction

To evaluate whether Jackson Inc. should accept the contract with Max Manufacturing Inc., it is crucial first to understand the differential costs that such a commitment would entail. Differential costs, also termed incremental costs, are the additional costs that will be incurred as a result of choosing one alternative over another. They are essential in decision-making because they represent the relevant expenses directly associated with a particular decision.

a. Differential Costs When Signing the Max Contract

The provided information suggests that to fulfill the contract, Jackson will need to hire an additional part-time trainer at an annual cost of $44,000. This cost is a clear incremental expense directly attributable to the contract, hence qualifying as a differential cost. Furthermore, operational costs such as supplies and other expenses are anticipated to increase by 14% and 16% respectively, based on last year's figures.

Suppose last year's supplies expense was S, and other costs were C. The increases mean that supplies will now be S 0.14, and other costs C 0.16. These incremental increases are directly related to accepting the contract and are therefore differential costs.

Finally, the company will need to lease new equipment at a cost of $2,500. Since this expense will only occur if the contract is accepted, it also qualifies as a differential cost.

In summary, the differential costs include:

  • Additional part-time trainer: $44,000
  • Increase in supplies: 14% of last year's supplies expense
  • Increase in other costs: 16% of last year's other costs
  • Leased equipment: $2,500

The actual dollar amounts for supplies and other costs depend on last year's figures, but the incremental costs can be determined once these are known.

b. Should Jackson Accept the Contract Based on Offer of $55,000?

Given that the company expects to receive $55,000 for the year, the decision hinges on comparing this revenue to the total differential costs incurred to provide the service. If the total differential costs are less than $55,000, accepting the contract would be profitable; if greater, it would result in a loss.

Here's the analysis: assuming last year's supplies were valued at S dollars and other costs at C dollars, the incremental expenses are $44,000 (trainer) + (14% of S) + (16% of C) + $2,500. The total differential costs (TDC) would thus be:

TDC = $44,000 + (0.14 S) + (0.16 C) + $2,500

Since exact last year’s figures are not provided, one must estimate based on known expenses. If, for this example, last year's supplies were $50,000 and other costs $100,000, then:

  • Supplies increase = 0.14 * 50,000 = $7,000
  • Other costs increase = 0.16 * 100,000 = $16,000

Adding up:

  • Trainer: $44,000
  • Supplies increase: $7,000
  • Other costs increase: $16,000
  • Leasing equipment: $2,500

Total differential costs: $44,000 + $7,000 + $16,000 + $2,500 = $69,500

Since this total exceeds the $55,000 offered, accepting the contract would result in a net loss of $14,500. Therefore, unless Jackson can negotiate a higher payment or reduce expenses, it would not be financially beneficial to proceed. If, however, actual costs are lower and total differential costs are less than the offered amount, then accepting might be justified.

In conclusion, based on the estimated differential costs and the offered price of $55,000, Jackson should decline the contract unless it can negotiate a higher fee or significantly reduce the incremental costs. The decision hinges on detailed knowledge of last year's expenses and the capacity to control costs.

References

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