Please see the attachment for the questions

CHANGE ORDER PRICING Review this case carefully and answer the questions that are listed throughout the case in detail. In January 20X1, the ABC Company received a contract from the Air Force for 175 electronic devices. The contract was a firm fixed price contract at a unit price of $115,000, anda total price of $20,125,000. The price included a 12% profit. The delivery schedule called for 25 a month commencing in May 20X1, with delivery to be completed by December 20X1 In July, a change was made by the Air Force in several of the components. At the time of the change the contractor had completed 75 but had not shipped any of the items. Another S0 units were partially completed. The components affected by the change were completed on 40 of the 50 items. Ten of the work-in-process items were not affected by the change. The contractor submitted the following cost proposal. I. COMPLETED UNITS AFFECTED BY THE CHANGE Labor Removing changed work New work 90 hours 140 hours 230 hours $30.00 6,900.00 12,420.00 3.250.00 S 22,570.00 3385.50 25,955.50 3114.60 S 29,070.10 **Overhead @ 180% Material Manufacturing Cost G&A @ 15% Profit @ 12% Total cost of change per unit Number of units affected by the change (75+40) 115 $3.343061.50 Labor estimated in the original contract@ $27.50 per hr **Overhead estimated in the original contract @ 1 10% *..G&A estimated in the original contract @ 6% UNITS ON WHICH CHANGED WORK HAD NOT BEEN PERFORMED Labor New worlk Less estimated cost of old work 140 hours 40 hours 100 hours@ $30.00 S 3,000.00 Overhead @ 180% 5,400.00 3,250.00 2650,00 Less old material Manufacturing Cost G&A @ 15% S 9,000.00 1350.00 10,350.00 1.242.00 11592.00 Total Cost Profit @ 12% Unit Cost of Change x 60 units on which none of the work affected by the change had been performed Total cost of change ($3,343,061.50+ $695,520.00) $4.038,581.50 This portion of the work had originally been estimated to take 70 hours Mr. Roger Stinson, who was assigned the responsibility of negotiating the change, requested that an analysis be made of the contractor's proposal. Mr. Richard Foster was assigned to the case by the Cost Analysis Section. His report to Mr. Stinson disclosed the following points of difference. 1. REMOVING CHANGED WORK Contractor's Proposal Air Force 90 hrs$30.00 60 hrs $27.50 Mr. Stinson was of the opinion that the company had overestimated the amount of time required to remove the work affected by the change which had already been performed. His opinion was strengthened by the fact that the contractor estimated the time required to install the work at only 40 hours elsewhere in his proposal. The contractor informed him that there was no relation between the time required to install new work and the cost of removing the old work that in this case a considerable amount of the changed work involved terminal block locations and wiring which was inaccessible without removing other work already installed QUESTIONS: I. Is the contractor's argument a reasonable one? 2. What should the buyer do? Mr. Foster also suggested that since the contractor had estimated labor at $27.50 per hour in the original contract, the same figure should be applied to the labor for removing the changed work QUESTIONS: 3. Do you agree with Mr. Foster's approach, vi; using the labor rate used in the original proposal to price out the work associated with the change ($27.50 versus 530.00)? 4. Would you advocate using the same approach if the work required by the change was to be performed by a lower paid class of workers than originally estimated (327.50 versus $22.50)? If composite labor rate, developed on the basis of the overall mix of work on the entire contract, was used in the original estimate, should the same composite rate be used in pricing the work associated with the change? 2. Contractor Air Force 140 hrs $30.00 95 hrs@S27.50 Mr. Foster was of the opinion that 95 hours is a liberal amount for this part of the estimate as the terminal block locations and wiring schematic of leads in the respective consoles were changed only slightly due to the change order and the balance of the assembly time was directly applicable to attaching subcontracted hamesses following almost the same routine as the original system. The contractor stated that Mr. Foster was not considering all of the costs of the change since he had included in the 140 hours for new work the labor costs associated with the three days during which his assemblers had to sit around with nothing to do while waiting for new wiring diagrams to be prepared and the materials required by the change secured. Mr. Foster replied that the contractor should have been able to use the personnel on other work. The contractor replied that the production of this item had been shut down for a total of 11 days and that he had been able to economically use the personnel affected on other work for 8 days, but could find nothing for them to do for the remaining 3 days. QUESTIONS: 6. Is the contractor entitled to charge the 3 days unused downtime to the cost of the change? 7 Assume that he paid the workers affected 530.00 per hour and used them on work for which he normaly paid only $20.00 per hour. Could he charge the difference to the cost of the change? The contractor further stated that Mr. Foster ignored the affect of the change on the learning of his employees. That, in calculating the cost of the new work, he had applied an appropriate learning curve and that he had also calculated the affect of the change on the rate of improvement on the 60 units on which none of the work affected by the change had been performed, plus an allowance for the affect of the change on the improvement rate of the unchanged portion of the work. QUESTIONS: 8. Should a learning curve be applied to work affected by the change? 9. Is the contractor entitled to claim the costs associated with the affect of the change on the rate of improvement for the changed work for the units on which none of the changed work has been performed? 10. Is the contractor entitled to recover costs associated with the affect of the change on the rate of improvement of the work not directly affected by the change? 3. Contractor's Estimate Air Force 40 hrs 70 hrs In attempting to determine what credit should be given for the old work on those units on which it had not been performed, Mr. Foster ran into considerable difficulty. He reviewed a copy of the contractor's original estimate but the cost of the work affected by the change had not been separated from the overall estimate. Relating the ratio of the changed work to the total number of hours in the original estimate, Mr. Foster determined that a credit of 70 hours should be used. To this the contractor replied that while Mr. Foster's estimate of 70 hours for the changed work in the original estimate was reasonable, he had again failed to take into account the improvement curve. The contractor contended that the 70 hours was the average for the entire quantity of 175 required by the contract while the credit should be based on the average for the last 60 units which would be considerably below the average for the entire 175 units. QUESTIONS: II. Is the contractor's approach a reasonable one? 12. Assuming the buyer accepts the contractor's contention, should he require that the MANUFACTURING BURDEN contractor furnish an improvement curve to substantiate his claim? Contractor Air Force 180% 110% The contractor had used a manufacturing burden rate of 180% in the change proposal. Mr Foster agreed that the increased rate would probably prevail during the period of performance for the changed work. He felt, however, that since the contractor has used a rate of 110% in his original proposal, that this rate should be used in pricing the change to prevent the contractor from repricing what otherwise might be a loss contract. QUESTIONS: 13. Do you agree with this approach of the cost analyst? 14. Assume that the situation was reversed, viz; that the contractor had used a rate of 180% in his original proposal and his rate for the period of performance of the change was 1 10%, would you approach the matter any differently? 5. MATERIAL Mr. Foster reviewed the estimated quantities and associated costs for both old and new material. Since he found no major discrepancies, he accepted the material costs without further question Contractor Air Force 15% 6% Mr. Foster used the same approach in computing G & A as he had for the manufacturing burden. The contractor had used 6% in his original estimate and Mr. Foster thought that the same rate should be used in pricing the change. QUESTIONS: 15. Do you agree with this approach? 16. If the situation was reversed, viz; the contractor had used a G&A rate of 15% in his original proposal, and his anticipated G&A rate during the period of performance of the changed work was 6%, would you approach the matter any differently 7. PROFIT Acknowledging that the profit, if any, to be allowed on the change was for the buyer to decide, Mr. Foster questioned whether the contractor was entitled to the same rate of profit on the change as on the original contract. QUESTIONS: 17. Do you think a contractor should receive the same rate of profit on costs associated 18. Under what circumstances might he get less? 19. Under what circumstances might he get more? Based on the foregoing analysis, Mr. Foster prepared the following estimate for the use of with change as on the original proposal? Mr. Stinson, the buyer I. Completed Units Affected By The Change Labor 60 hours Removing changed work New work 155 hours @ $27.50 S 4,262.50 4,688.70 3,250.00 S 12.201.20 Overhead @ 1 10% Material Manufacturing Cost G&A @ 6% S 12,933.20 1551.90 S 14.485.10 Profit @ 12% Total cost of change per unit Number of units affected by the change (75+40) x 115 II. Units On Which Changed Work Had Not Been Performed Labor New work Less estimated cost of old work 95 hours 70 hours 25 hours $27.50 S 687.50 Overhead @ 110% 756.20 Material 3,250.00 2,650.00 Less old material Manufacturing Cost G&A @ 6% S 2,043.70 122.60 S 2,166.30 259.90 $ 2,426.20 Total Cost Profit @ 12% Unit Cost of Change x 60 units on which none of the work affected by the change had been performed TOTAL COST OF CHANGE Item I Contracto Air Force S3,343,061.50 S1,665,786.50 Item II $695,520.00 S145.572.00 $4,038,581.50 $1,811,358.50 CHANGE ORDER PRICING Review this case carefully and answer the questions that are listed throughout the case in detail. In January 20X1, the ABC Company received a contract from the Air Force for 175 electronic devices. The contract was a firm fixed price contract at a unit price of $115,000, anda total price of $20,125,000. The price included a 12% profit. The delivery schedule called for 25 a month commencing in May 20X1, with delivery to be completed by December 20X1 In July, a change was made by the Air Force in several of the components. At the time of the change the contractor had completed 75 but had not shipped any of the items. Another S0 units were partially completed. The components affected by the change were completed on 40 of the 50 items. Ten of the work-in-process items were not affected by the change. The contractor submitted the following cost proposal. I. COMPLETED UNITS AFFECTED BY THE CHANGE Labor Removing changed work New work 90 hours 140 hours 230 hours $30.00 6,900.00 12,420.00 3.250.00 S 22,570.00 3385.50 25,955.50 3114.60 S 29,070.10 **Overhead @ 180% Material Manufacturing Cost G&A @ 15% Profit @ 12% Total cost of change per unit Number of units affected by the change (75+40) 115 $3.343061.50 Labor estimated in the original contract@ $27.50 per hr **Overhead estimated in the original contract @ 1 10% *..G&A estimated in the original contract @ 6% UNITS ON WHICH CHANGED WORK HAD NOT BEEN PERFORMED Labor New worlk Less estimated cost of old work 140 hours 40 hours 100 hours@ $30.00 S 3,000.00 Overhead @ 180% 5,400.00 3,250.00 2650,00 Less old material Manufacturing Cost G&A @ 15% S 9,000.00 1350.00 10,350.00 1.242.00 11592.00 Total Cost Profit @ 12% Unit Cost of Change x 60 units on which none of the work affected by the change had been performed Total cost of change ($3,343,061.50+ $695,520.00) $4.038,581.50 This portion of the work had originally been estimated to take 70 hours Mr. Roger Stinson, who was assigned the responsibility of negotiating the change, requested that an analysis be made of the contractor's proposal. Mr. Richard Foster was assigned to the case by the Cost Analysis Section. His report to Mr. Stinson disclosed the following points of difference. 1. REMOVING CHANGED WORK Contractor's Proposal Air Force 90 hrs$30.00 60 hrs $27.50 Mr. Stinson was of the opinion that the company had overestimated the amount of time required to remove the work affected by the change which had already been performed. His opinion was strengthened by the fact that the contractor estimated the time required to install the work at only 40 hours elsewhere in his proposal. The contractor informed him that there was no relation between the time required to install new work and the cost of removing the old work that in this case a considerable amount of the changed work involved terminal block locations and wiring which was inaccessible without removing other work already installed QUESTIONS: I. Is the contractor's argument a reasonable one? 2. What should the buyer do? Mr. Foster also suggested that since the contractor had estimated labor at $27.50 per hour in the original contract, the same figure should be applied to the labor for removing the changed work QUESTIONS: 3. Do you agree with Mr. Foster's approach, vi; using the labor rate used in the original proposal to price out the work associated with the change ($27.50 versus 530.00)? 4. Would you advocate using the same approach if the work required by the change was to be performed by a lower paid class of workers than originally estimated (327.50 versus $22.50)? If composite labor rate, developed on the basis of the overall mix of work on the entire contract, was used in the original estimate, should the same composite rate be used in pricing the work associated with the change? 2. Contractor Air Force 140 hrs $30.00 95 hrs@S27.50 Mr. Foster was of the opinion that 95 hours is a liberal amount for this part of the estimate as the terminal block locations and wiring schematic of leads in the respective consoles were changed only slightly due to the change order and the balance of the assembly time was directly applicable to attaching subcontracted hamesses following almost the same routine as the original system. The contractor stated that Mr. Foster was not considering all of the costs of the change since he had included in the 140 hours for new work the labor costs associated with the three days during which his assemblers had to sit around with nothing to do while waiting for new wiring diagrams to be prepared and the materials required by the change secured. Mr. Foster replied that the contractor should have been able to use the personnel on other work. The contractor replied that the production of this item had been shut down for a total of 11 days and that he had been able to economically use the personnel affected on other work for 8 days, but could find nothing for them to do for the remaining 3 days. QUESTIONS: 6. Is the contractor entitled to charge the 3 days unused downtime to the cost of the change? 7 Assume that he paid the workers affected 530.00 per hour and used them on work for which he normaly paid only $20.00 per hour. Could he charge the difference to the cost of the change? The contractor further stated that Mr. Foster ignored the affect of the change on the learning of his employees. That, in calculating the cost of the new work, he had applied an appropriate learning curve and that he had also calculated the affect of the change on the rate of improvement on the 60 units on which none of the work affected by the change had been performed, plus an allowance for the affect of the change on the improvement rate of the unchanged portion of the work. QUESTIONS: 8. Should a learning curve be applied to work affected by the change? 9. Is the contractor entitled to claim the costs associated with the affect of the change on the rate of improvement for the changed work for the units on which none of the changed work has been performed? 10. Is the contractor entitled to recover costs associated with the affect of the change on the rate of improvement of the work not directly affected by the change? 3. Contractor's Estimate Air Force 40 hrs 70 hrs In attempting to determine what credit should be given for the old work on those units on which it had not been performed, Mr. Foster ran into considerable difficulty. He reviewed a copy of the contractor's original estimate but the cost of the work affected by the change had not been separated from the overall estimate. Relating the ratio of the changed work to the total number of hours in the original estimate, Mr. Foster determined that a credit of 70 hours should be used. To this the contractor replied that while Mr. Foster's estimate of 70 hours for the changed work in the original estimate was reasonable, he had again failed to take into account the improvement curve. The contractor contended that the 70 hours was the average for the entire quantity of 175 required by the contract while the credit should be based on the average for the last 60 units which would be considerably below the average for the entire 175 units. QUESTIONS: II. Is the contractor's approach a reasonable one? 12. Assuming the buyer accepts the contractor's contention, should he require that the MANUFACTURING BURDEN contractor furnish an improvement curve to substantiate his claim? Contractor Air Force 180% 110% The contractor had used a manufacturing burden rate of 180% in the change proposal. Mr Foster agreed that the increased rate would probably prevail during the period of performance for the changed work. He felt, however, that since the contractor has used a rate of 110% in his original proposal, that this rate should be used in pricing the change to prevent the contractor from repricing what otherwise might be a loss contract. QUESTIONS: 13. Do you agree with this approach of the cost analyst? 14. Assume that the situation was reversed, viz; that the contractor had used a rate of 180% in his original proposal and his rate for the period of performance of the change was 1 10%, would you approach the matter any differently? 5. MATERIAL Mr. Foster reviewed the estimated quantities and associated costs for both old and new material. Since he found no major discrepancies, he accepted the material costs without further question Contractor Air Force 15% 6% Mr. Foster used the same approach in computing G & A as he had for the manufacturing burden. The contractor had used 6% in his original estimate and Mr. Foster thought that the same rate should be used in pricing the change. QUESTIONS: 15. Do you agree with this approach? 16. If the situation was reversed, viz; the contractor had used a G&A rate of 15% in his original proposal, and his anticipated G&A rate during the period of performance of the changed work was 6%, would you approach the matter any differently 7. PROFIT Acknowledging that the profit, if any, to be allowed on the change was for the buyer to decide, Mr. Foster questioned whether the contractor was entitled to the same rate of profit on the change as on the original contract. QUESTIONS: 17. Do you think a contractor should receive the same rate of profit on costs associated 18. Under what circumstances might he get less? 19. Under what circumstances might he get more? Based on the foregoing analysis, Mr. Foster prepared the following estimate for the use of with change as on the original proposal? Mr. Stinson, the buyer I. Completed Units Affected By The Change Labor 60 hours Removing changed work New work 155 hours @ $27.50 S 4,262.50 4,688.70 3,250.00 S 12.201.20 Overhead @ 1 10% Material Manufacturing Cost G&A @ 6% S 12,933.20 1551.90 S 14.485.10 Profit @ 12% Total cost of change per unit Number of units affected by the change (75+40) x 115 II. Units On Which Changed Work Had Not Been Performed Labor New work Less estimated cost of old work 95 hours 70 hours 25 hours $27.50 S 687.50 Overhead @ 110% 756.20 Material 3,250.00 2,650.00 Less old material Manufacturing Cost G&A @ 6% S 2,043.70 122.60 S 2,166.30 259.90 $ 2,426.20 Total Cost Profit @ 12% Unit Cost of Change x 60 units on which none of the work affected by the change had been performed TOTAL COST OF CHANGE Item I Contracto Air Force S3,343,061.50 S1,665,786.50 Item II $695,520.00 S145.572.00 $4,038,581.50 $1,811,358.50