Reference no: EM13194535

Cost, Pricing, Scheduling, and Control 

Cost Estimation 

Suppose that you have been asked to price an 8-month external project. Direct labor is estimated at $100,000 per month, plus a 100% overhead rate. The total labor termination liability in any particular month includes, of course, the total amount (100%) of the current month's labor expense (including overhead) plus (with the exception of the final month) a penalty of 80% of the following month's labor expense (including overhead). So the total accumulated labor liability at any point during the project is equal to the accumulated labor expenses accrued up to the previous month, plus the current month's labor termination liability. There are two material resources. Material A will cost $100,000, payable 30 days net. This material is needed at the end of the 5th month and has a 4-month lead time. The termination liability on Material A in any particular month is as follows: 
1-30 days after ordering: 25% 
31-60 days after ordering: 50% 
>60 days until the expense is paid in full: 100% after the expense has been paid in full, there is no additional termination liability. 
Material B will cost $200,000, payable on delivery. This material is needed at the end of the 7th month and has a 3-month lead time. The termination liability on Material B in any particular month is as follows: 
1-30 days after ordering: 50% 
>30 days until the expense is paid in full: 100% after the expense has been paid in full, there is no additional termination liability. 
To simplify the analysis, assume that all 8 months identically contain exactly 30 days. Also assume that any payment or liability that occurs on a month boundary should be assigned to the month that falls before this boundary (not the one that comes after the boundary). Assume that you can neglect profits. Assume that the customer has agreed to buy this project and pay, at the end of each month, 100% of all costs incurred during that month. Assume that the project is guaranteed to execute precisely on schedule. 
1. Based on this information, how much burdened labor cost would the customer be obligated to pay at the end of the 1st month (assuming that the project had not been terminated)? 
a. $150,000 
b. $0 
c. $200,000 
d. $160,000 

2. For the same project, how much additional labor termination liability would be added to the burdened labor cost to calculate the customer's total labor liability at the end of the 1st month if the customer should decide to terminate the project at that point?
a. $200,000 
b. $50,000 
c. $0 
d. $160,000 PROJ522 - Cost, Pricing, Scheduling, and Control 

3. For the same project, what is the customer's total accumulated labor liability at the end of the 2nd month if the customer should decide to terminate the project at that point? (Hint: They would be responsible for covering 2 months of burdened labor costs incurred plus one month of additional termination liability.) 
a. $720,000 
b. $560,000 
c. $320,000 
d. $400,000 

4. For the same project, what is the customer's total accumulated labor liability at the end of the 3rd month if the customer should decide to terminate the project at that point? (Hint: They would be responsible for covering 3 months of burdened labor costs incurred plus one month of additional termination liability.) 
a. $600,000 
b. $480,000 
c. $560,000 
d. $760,000 

5. For the same project, what is the customer's total accumulated material liability at the end of the 4th month if the customer should decide to terminate the project at that point? 
a. $200,000 
b. $25,000 
c. $75,000 
d. $100,000

6. For the same project, what is the customer's total accumulated material liability at the end of the 5th month if the customer should decide to terminate the project at that point? 
a. $300,000 
b. $0 
c. $200,000 
d. $100,000

7. For the same project, what is the customer's total accumulated liability (including both material and labor) at the end of the 7th month if the customer should decide to terminate the project at that point? 
a. $1,560,000 
b. $1,860,000 
c. $1,700,000 
d. $1,900,000

8. For the same project, what is the customer's total accumulated liability (including both material and labor) at the end of the 8thmonth if the customer should decide to terminate the project at that point? 
a. $1,760,000 
b. $2,060,000 
c. $1,900,000 
d. $1,600,000.