completion. Item8 Part 5 of 5 10 points Return to questionItem 8Item 8 Part 5 of 5 10 points Required information [The following
information applies to the questions displayed below.] In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2023. Information related to the contract is as follows: 2021 2022 2023 Cost incurred during the year $ 2,542,000 $ 3,772,000 $ 2,074,600 Estimated costs to complete as of year-end 5,658,000 1,886,000 0 Billings during the year 2,020,000 4,294,000 3,686,000 Cash collections during the year 1,810,000 3,800,000 4,390,000 Westgate recognizes revenue over time according to percentage of completion. 5. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years assuming the following costs incurred and costs to complete information. (Do not round intermediate calculations and round your final answers to the nearest whole dollar amount. Loss amounts should be indicated with a minus sign.)
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Answer:
additional revenue = $26,250
relevant costs:
direct materials = 350 x $82 = $28,700
direct labor = 525 x $15 = $7,875
setup hours = 1 x $5 = $5
inspection costs = 20 x $5 = $100
machining = 175 x $3 = $525
total relevant costs = $37,205
1) change in income if order is accepted:
total revenue - total relevant costs = $26,250 - $37,205 = -$10,955
the company will incur a loss of $10,955 if the order is approved.
2) if the cost of direct materials is decreased by $13 per unit = $13 x 350 = $4,550, and if direct labor can be reduced by 0.5 hours per unit = 175 hours (= 175 x $15 = $2,625) ⇒ total relevant costs will be lowered by $7,175.
It results in a $3,780 (= $10,955 - $7,175) loss if the special order is accepted.
