The WIP balance for Job A-5 is $2,380 and the WIP balance for Job A-7 is $1,145. Together, they create a balance of $3,525.
a.) I would not have taken the order from Mrs. Carter at the price of $1,500.
b.) If Lambeth would have taken the offer, they would have lost a profit of at least $125. Mrs. Carter was willing to pay no more than $1,500 for her cabinets, and Lambeth could not build what she wanted for less than $1,625. Ultimately, Lambeth would have lost $400 in taking her offer, which includes the extra $125 needed to build the cabinets and the $275 profit they wanted to make off the job costing $1,900.
c.) I would consider taking the order at $1,500 under a few conditions. If Lambeth would attempt cutting costs, such as material, then he would possibly be able to compete with other businesses like Walworth Custom Kitchens. Also, if he would have suppliers bid on prices he could find the cheapest possible products of the same quality, ultimately reducing costs. Another possibility is if he were to buy new equipment that lessens labor time. This would mean he could save costs and provide cheaper estimates for his clients. Under variable costing, Lambeth would have been able to take the order. This method includes only variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) in unit product costs and incurs manufacturing overhead in the period a product is produced, addressing the issue of absorption costing that allows income to rise as production rises.
