George Jettson Builds Custom Homes in Cincinnati

George Jettson builds custom homes in Cincinnati. Jettson was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows:
Jettson 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 Jettson accept the client's offer? Why?
B. If Jettson has more business than he can handle, how much should he be willing to accept for the home? Why?

Correct Answer:

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A. A relevant cost analysis shows that t...

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