Is the new contract worth the capacity it consumes?
Include displaced contribution before accepting a contract that fills the depot.
The question
NorthPier Repair, a fictional Canadian service depot, has 1,600 technician hours next month and no overtime option. Normal staff and overhead cost are fixed. Regular demand is not yet committed and can be declined without penalty. Contributions are after parts and other variable costs.
| Value | |
|---|---|
| Available technician hours | 1600 |
| Hours per regular job | 2 |
| Contribution per regular job CAD | 100 |
| Initial regular demand jobs | 600 |
| Hours per contract job | 4 |
| Contribution per contract job CAD | 90 |
| Full contract jobs | 150 |
| Possible negotiated contract jobs | 100 |
Invented inputs. The full contract is initially all-or-nothing. A smaller contract requires the customer’s agreement. No transfer or cancellation cost is assumed.
“Is the new contract worth the capacity it consumes?”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Identify the scarce resource
What would you do here? Open the move you’d make.
Add the contract’s revenue without checking the schedule.
Tempting, but it misses something. The proposed workload exceeds capacity.
Reject any contract that uses more than the currently spare hours.
Tempting, but it misses something. A profitable trade-off may exist if displaced work is worth less.
Compare the full workload with the hours actually available.
The strong move. This identifies the capacity that has an opportunity cost.
See how a strong candidate says it
“Regular demand needs 1,200 hours. The full contract needs 600, so it would displace 200 hours of regular work.”
Why it works: The hours cannot serve both jobs at the same time.
Step 2: Price the displaced work
What would you do here? Open the move you’d make.
Deduct CAD10,000 of displaced contribution from CAD13,500.
The strong move. This gives the net gain over the current plan.
Treat all CAD13,500 as incremental profit.
Tempting, but it misses something. It omits the work that can no longer be served.
Deduct all existing payroll again from the contract.
Tempting, but it misses something. That cost does not change between these plans.
See how a strong candidate says it
“The contract adds CAD13,500 contribution but displaces 100 regular jobs worth CAD10,000. Net operating-profit gain is CAD3,500.”
Why it works: Fixed cost is unchanged; the relevant loss is the displaced contribution.
Step 3: Negotiate the better scope
What would you do here? Open the move you’d make.
Book 100 jobs as agreed before the customer responds.
Tempting, but it misses something. The original offer is all-or-nothing.
Propose 100 jobs and confirm the customer’s acceptance.
The strong move. This tests the more profitable feasible shape.
Choose 150 jobs because utilization is higher.
Tempting, but it misses something. Higher utilization does not guarantee the highest profit.
See how a strong candidate says it
“A 100-job contract would fit the 400 spare hours and add CAD9,000 without displacement, if the customer accepts.”
Why it works: A smaller scope can earn more incremental profit than filling the depot with lower-contribution work.
Step 4: Revise when regular demand rises
Regular demand now forecasts 700 jobs. The full contract still has 150 jobs; capacity and contribution per job are unchanged.
What would you do here? Open the move you’d make.
Keep the original CAD3,500 gain.
Tempting, but it misses something. That gain used a lower regular-demand forecast.
Ignore the new demand because the contract price is fixed.
Tempting, but it misses something. The price is fixed but the opportunity cost is not.
Reopen the full contract decision using the new displaced contribution.
The strong move. The full contract now reduces expected profit.
See how a strong candidate says it
“With 700 regular jobs forecast, full acceptance displaces 200 jobs and loses CAD6,500 relative to serving regular demand. Reprice, retime or renegotiate.”
Why it works: More valuable alternative work changes the opportunity cost.
The answer, in short
- Decision
- Renegotiate scope, timing or price instead of accepting the full contract unchanged.
- Because
- The higher regular-demand forecast raises the cost of displaced work.
- What would change it
- New commitments, demand, job times or genuinely available capacity change the opportunity cost.
Common traps
- Confusing full utilization with maximum profit.
- Assuming the customer has accepted a smaller scope.
Check your answer
- Which hours are scarce?
- What work is displaced?
- Which costs actually change?
- Is the alternative contract agreed or only proposed?
Last reviewed Nov 10, 2026