Mission Roofing Performs Roofing Services for Commercial Clients Mission Adds a 20% Profit Margin to All Jobs, Computed

Mission Roofing performs roofing services for commercial clients. The company recently submitted a bid of $371,000 to the Shawnee School System, computed as follows: $\begin{array} { | l | r | } \hline \text { Construction materials } & \$ 80,000 \\\hline \text { Labour costs } & 170,000 \\\hline \text { Total direct costs } & \$ 250,000 \\\hline \text { Construction overhead } - 30 \% \text { of labour } & 51,000 \\\hline \text { Allocated administrative overhead } & 20,000 \\\hline \text { Total cost } & \$ 321,000 \\\hline\end{array}$ Mission adds a 20% profit margin to all jobs, computed on the basis of total direct cost. In Shawnee's case the profit margin amounted to $50,000 ($250,000 x 20%), producing a bid price of $371,000. Assume that 60% of construction overhead is fixed.
Required:
A. If Mission had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can Mission justify this amount?
B. If Mission had no excess capacity, 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?

Correct Answer:

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A. The cost total would be the increment...

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