LAMBETH CUSTOM CABINETS (A)

Jack Lambeth, a master cabinetmaker, owned and operated a shop where he sold custom-made cabinets. At the beginning of September, he had no outstanding debts, and the following amounts were on his books:

1. Raw-material inventory, $4,950

2. Supplies inventory, $1,175

3. Work-in-process inventory, $5,900

Job	Materials	Labor	Overhead(50% of Labor
A-3	$1,000	$1,100	$550
A-4	900	650	325
A-5	325	700	350
Total	$2,225	$2,450	$1,225	$5,900

4. All other assets as of September 1, $16,890

During the month, Lambeth's woodworking crew finished jobs A-3, A-4, and A-6, but did not finish A-5. Job A-7 was started but not finished during September. Overhead costs( pertainng primarily to equipment and shop depreciation, cleaning supplies, and insurance) were applied to every job at the end of the month unless the job was finished during the month, in which case overhead was applied when the job was finished.

During September, the following direct-materials and direct-labor costs were incurred:

Job	Direct Materials	Direct Labor
A-3	$280	$750
A-4	350	1,300
A-5	180	550
A-6	375	490
A-7	590	370
	$1,775	$3,460

Other important financial facors in September were as follows:

1. Raw materials costing $1,950 were purchased during the month.

2. Supplies costing $875 were purchased, of which $490 were used and thus transferred to the manufacturing-overhead account.

3. Total increase to the labor-genral-ledger account were $5,460(apparently, $2,000 of indirect-labor costs were charged)

4. General and administrative expenses for the month were $3,420

5. Collections receieved from customers on jobs A-3, A-4, and A-6 amounted to $6,125, $8,600, and $1,750, respectively, for a total of $16,475.

6. At the end of the month, Lambeth Custom Cabinets had no outstanding debts.

While Lambeth was reviewing the September data, he came concerned about the manufacturing-overhead variance(MOV). Because he never wanted to lay off an employee, the MOV was always large in months when business was slow.(Lambeth assigned idle workers to general cleanup and repair work, and charged their wages to indirect labor.) Of course, Lambeth realized why the MOV was large. What he was worried about, however, was Mrs. Carter.

Mrs. Carter, a neighbor, had stopped by the shop one day in early September to get a price on some cabinets she wanted built. Lambeth's son, Jack Jr. spoke with her. Jack Jr. was working in the shop while on summer vacation between his first and second year of graduate business school. He studied Mrs. Carer's plans, and estimated the cost of building her cabinets to be $1,625. His job-estimation sheet showed the following:

Lumber	$590
Finishing materials	75
Direct-labor cost	640
Overhead	320
	$1,625

When Jack Jr. quoted a price of $1,900 ($1,625 cost plus $275 profit) to Mrs. Carter, she said that she could get the same thing built by Walworth Custom Kitchens for $1,500. Furthermore, she informed him, "I would throw the dumb economics books away before I would pay a penny more than $1,500 for book cabinets to store them"

Jack Jr. simply told her that his best price was $1,900. He explained all about labor, materials, profit, overhead, and competitive capitalism. In addition, he told Mrs. Carter that Walworth could not make money on a $1,500 price, and if Walworth was really willing to build the shelves for $1,500, she would be stealing from Mr, Walworth!

Mrs. Carter was very angry when she left. Jack Jr. later told his father the whole story, and laughed as he said,"Heck, we can't build stuff that costs $1,625 and sell it at a price of $1,600, let alone $1,500, can we?" At the time, Lambeth did not think much about the incident, but he began to wonder whether Jack Jr. had learned anything at graduate business school. Lambeth became especially concerned when he saw Bob Walworth, who said, "Mrs. Carter saved me last month." Walworth had just delivered Mrs. Carter's new cabinets, for which she paid $1,500. Lambeth wondered who was right: Jack Jr. or Walorth?

3. Without changing the expense figures of Mrs. Carter's job, under what conditions should Lambeth have accepted the job at a price of $1,500? Base on these conditions, what is the maximum possible increase in profit the company could have achieved from this job while charging only $1,500? Explain.

5. Would a business be better or worse off if Lambeth had Taken the order at $1,500? (Hint: A Variable Costing/ Contribution Margin Analysis would be helpful here.)

I have questions 1 and 2 but am struggling with number 5