Question - Cost-plus, time and materials, ethics
A & L Mechanical sells and services plumbing, heating, and air-conditioning systems. A & L's cost accounting system tracks two cost categories: direct labor and direct materials. A & L uses a time-and-materials pricing system, with direct labor marked up 80% and direct materials marked up 60% 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 central air conditioning in Michelle Lowry's home stops working. A & L technician Tony Dickenson 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 Dickenson follows:
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Labor
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Materials
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Repair option
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7 hrs.
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$120
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Replace option
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4 hrs.
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$230
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Labor rate $45 per hr.
1. If Dickenson 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 Dickenson's objective is to maximize profits, which option would he recommend to Lowry?