Cary Construction Inc. is preparing to bid on a job building a new dorm for 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 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?