Preston Concrete is a major supplier of concrete to residential and commercial builders in the Pacific Northwest. The company's policy is to price deliveries at 25 percent over full cost per cubic yard (including an allowance for administrative costs). At the start of 2017, the company estimated costs as follows:
Material costs = $75 per cubic yard
Delivery costs = $500,000 per year + $10 (mile) + $50 (truck hour)
Yard operation costs = $300,000 per year + $17 per cubic yard
Administrative costs = $2,000,000 per year
Delivery costs include a rate per mile, recognizing that more miles result in more gas and maintenance costs, and a rate per truck hour since, even if a delivery truck is kept waiting at a job site, the truck must be kept running (so the concrete mix will not solidify) and the driver must be paid. At the start of 2017, the company estimated that it would deliver 500,000 cubic yards.
Required
a. On October 28, Fairview Construction asked Preston to deliver 6,000 cubic yards of concrete. The job will require driving 8,400 miles and 300 truck hours. What will the price be if Preston follows its normal pricing policy?
b. A sharp increase in interest rates has reduced housing starts and the demand for concrete. Fairview has indicated that it will sign a firm order agreement only if the price is $115 per cubic yard. Should Preston accept the order? Briefly indicate factors that, while hard to quantify, should be taken into account in this decision.