ax Construction Company plans to erect a new building. It will use part of the space for its own offices and lease the balance of the space to tenants. The company has two alternatives: (1) do its own construction work or (2) use an independent contractor. Cost estimates have been prepared to show the costs of operation for the coming year during which the new building will be constructed. The costs of constructing the building, if done by Jax, are included in that set of estimates. If the company does its own construction work, it will not be able to handle outside construction contracts that would contribute $500,000 to net income. The costs attributable to these outside contracts are excluded from the estimated costs of operation shown below. Estimated Costs to Operate – Construction by Independent Contractors Estimated Costs to Operate (including Construction) – Construction by Jax (self) Materials $6,000,000 $7,000,000 Labour 3,000,000 4,800,000 Indirect materials and supplies 315,000 400,000 Supervision 650,000 780,000 Taxes and insurance 50,000 55,000 Heat and light 47,000 47,000 Maintenance and repairs 106,000 106,000 Truck and equipment operation 91,000 91,000 Depreciation 60,000 60,000 Travel 40,000 43,000 Telephone 10,000 10,000 Other utilities 50,000 50,000 Miscellaneous 10,000 10,000 The independent company has bid $4,000,000 for the job. Required: Which of the two alternatives should be selected? Show all calculations. Are there any qualitative or non-financial factors that the firm should consider in the decision-making process?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Jax Construction Company plans to erect a new building. It will use part of the space for its own offices and lease the balance of the space to tenants. The company has two alternatives: (1) do its own construction work or (2) use an independent contractor.

Cost estimates have been prepared to show the costs of operation for the coming year during which the new building will be constructed. The costs of constructing the building, if done by Jax, are included in that set of estimates.

If the company does its own construction work, it will not be able to handle outside construction contracts that would contribute $500,000 to net income. The costs attributable to these outside contracts are excluded from the estimated costs of operation shown below.

	Estimated Costs to Operate – Construction by Independent Contractors	Estimated Costs to Operate (including Construction) – Construction by Jax (self)
Materials	$6,000,000	$7,000,000
Labour	3,000,000	4,800,000
Indirect materials and supplies	315,000	400,000
Supervision	650,000	780,000
Taxes and insurance	50,000	55,000
Heat and light	47,000	47,000
Maintenance and repairs	106,000	106,000
Truck and equipment operation	91,000	91,000
Depreciation	60,000	60,000

Travel	40,000	43,000
Telephone	10,000	10,000
Other utilities	50,000	50,000
Miscellaneous	10,000	10,000

The independent company has bid $4,000,000 for the job.

Required: Which of the two alternatives should be selected? Show all calculations. Are there any qualitative or non-financial factors that the firm should consider in the decision-making process?

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