Question

Cary Construction Inc. is preparing to bid on a job building a new dorm fo the local college. Cary expects that the job will require $850,000 of direct materials, $500,000 of direct labor, and $425,000 of overhead costs. Administrative and other expenses for the job are expected to be $2,000. On average last year, Cary Construction earned about $250,000 profit on a job this size and would like to increase the profit by 5 percent on new contracts. Cary normally applies a markup on a cost of goods sold to arrive at an initial bid price and then adjusts. the price if necessary in order to meet competitors' prices. The college already has one bid from a national construction company to do the job for $2,000,000.

a.) calculate the markup percentage on the new job.

b.) what is Cary Construction's initial bid?

c.) In light of the competitor's price of $2,000,000, what would you recommend as a bid price for Cary Construction?

Answer 1

Answer:-

Cary Construction Inc. Bid Value
Particulars		Amount
Direct Material		$850,000
Add: Direct Labour		$500,000
Add: Overhead		$425,000
Prime Cost		$1,775,000
Add: Administrative & other Expenses		$2,000
Total Cost		$1,777,000
Add: Profit ($250,000+5%)		$262,500
Total Bid Value		$2,039,500

a). Markup Percentage on the new Job

Markup = (Profit/Total Cost)*100

Markup = ($262,500/$1,777,000)*100

Markup = 14.77% (approx)

b). Carry Construction's Initial Bid value is $2,039,500 as stated above.

c) As compare to competitor's price of $2,000,000, Carry Construction's Bid value (i.e. $2,039,500) is higher. Therefore Carry Construction's have to reduce it's profit atleast by $39,500 to match the competitor's bid price.

In that case Markup (%) would be 12.55% which is as follows:-

Markup = (Profit/Total Cost)*100

Markup = ($223,000/$1,777,000)*100

Markup = 12.55% (approx)