Californian Instruments, Inc. California Instruments, Case Study

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Without any historical costs (which would have been very useful as a basis for the evaluation), the company could only predict the future charges and hope that the fluctuations would not have any major deviation from the forecasts.



As the case emphasizes, in the situation of a fixed-price contract, the contractor must take into account all possible changes that may occur during the performance of his activity. Thus, there is a possibility for the costs to increase with a larger amount than he had envisioned (therefore, he will record losses) or the expenditure may be lower than the predicted figures (thus, he will gain on this account).

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Moreover, in addition to that uncertainty, due to the fact that it had never performed similar activities, the company has no historical costs which could be used as references. The non-existence of a clear basis for the costs (such as historical costs) determines a huge responsibility from the part of the persons in charge. As a consequence, these persons should possess very good skills for the forecasting process and a deep experience and superior understanding of the company's activity in order to assure its future success.


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