Aerial Roofing performs roofing services for commercial clients. The company recently submitted a bid of $371,000 to the Ponca School System, computed as follows:Construction materials$80,000Labor costs170,000Total direct costs$250,000Construction overhead - 30% of labor51,000Allocated administrative overhead20,000Total cost$321,000Aerial adds a 20% profit margin to all jobs, computed on the basis of total direct cost. In Ponca's case the profit margin amounted to $50,000 ($250,000 × 20%), producing a bid price of $371,000. Assume that 60% of construction overhead is fixed.Required:A. If Aerial had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can High justify this amount?B. If Aerial had no excess capacity,

Question

what would be the lowest price that the company should charge?C. What is the primary benefit and problem of approaching a competitive bid situation with a low-bid philosophy?

What will be an ideal response?

Answer 1

A. The cost total would be the incremental cost associated with the job, or $270,400 [($80,000 + $170,000 + ($51,000 × 40%)]. The company has excess capacity; thus, any amount it can receive in excess of $270,400 will provide a positive contribution toward covering the fixed costs and boosting profit. Note: The fixed construction overhead and allocated administrative overhead are ignored here, as these costs will be incurred regardless of whether Aerial gets the job.
B. No excess capacity indicates a very strong market, with Aerial likely having a steady backlog of work. The company should cover all of its costs, producing a bid of $371,000.
C. A low-bid philosophy will likely translate into additional business, as a company will often be successful in its bidding efforts. Unfortunately, if the bids are too low, the firm might not be able to cover its costs.