A & L Mechanical sells and services plumbing, heating, and air-conditioning systems. A & L’s cost accounting system tracks two cost categories: direct labor and
direct materials. A & L uses a time-and-materials pricing system, with direct labor marked up 80% and
direct materials marked up 60% to recover indirect costs of support staff, support materials, and shared
equipment and tools and to earn a profit.
During a hot summer day, the central air conditioning in Michelle Lowry’s home stops working. A & L
technician Tony Dickenson arrives at Lowry’s home and inspects the air conditioner. He considers two options:
replace the compressor or repair it. The cost information available to Dickenson follows:
Labor Materials
Repair option 7 hrs. $120
Replace option 4 hrs. $230
Labor rate $45 per hr.
1. If Dickenson presents Lowry with the replace or repair options, what price would he quote for each?
2. If the two options were equally effective for the 3 years that Lowry intends to live in the home, which
option would she choose?
3. If Dickenson’s objective is to maximize profits, which option would he recommend to Lowry? What
would be the ethical course of action?