Greg Smithson builds custom homes in Cincinnati. Smithson was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows:
|
Land |
$90,000 |
|
Construction materials |
120,000 |
|
Subcontractor labor costs |
150,000 |
|
$360,000 |
|
|
Consruction overheas: 20% of direct costs |
72,000 |
|
Allocated corporate overhead |
40,000 |
|
Total cost |
$472,000 |
Smithson adds a 25% profit margin to all jobs, computed on the basis of total cost. In this client”s case the profit margin amounted to $118,000 ($472,000 25%), producing a bid price of $590,000. Assume that 60% of construction overhead is fixed.
Required:
A. Suppose that business is presently very slow, and the client countered with an offer on this home of $455,000. Should Smithson accept the client”s offer? Why?
B. If Smithson has more business than he can handle, how much should he be willing to accept for the home? Why?