Austin Company, which experiences considerable seasonal variation in its activity and has a high level of fixed costs, is preparing a bid for a project. This particular project will be done during a slack period of the year.Required:A. How should the fixed costs be handled in the bidding approach to this project?B. Assume that the company wins the bid and performs the job on a profitable basis, consistent with the results as projected in the bid. Several months later, the customer contacts Austin and requests a bid to do another job. This project, however, must be done during a peak season. How should Austin's management respond? How do you think the customer will respond?
What will be an ideal response?
A. Fixed costs should not receive the same emphasis that would be given if the project were to be done during a peak time. Any contribution that this project can make in excess of the direct incremental costs will boost the profit of the company.
B. The bid for the second project cannot be prepared on the same basis as the bid for the first project because of timing. The requirement to perform the job during a peak season means that the job must provide a sufficient return to make it more attractive than other jobs. In other words, fixed costs should be considered, and the bid price would be higher.
The customer is likely to be unhappy about the considerable change in bid from the first project. However, if the customer understands the seasonal nature of Austin's business, then perhaps the customer will change its schedule and better "time" its purchases to occur in Austin's slow season.
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