A road contractor has been using kilometers of road constructed as a cost driver. Based on last year’s costs, he estimates that he can build a mile of road for \($3\) million. The county has recently asked him for an estimate to build 20 kilometers of road.

Before making his bid based on his \($3\) million per kilometer estimate, he goes to his accountant for advice. The accountant has analyzed last year’s costs much differently.

She has divided last year’s costs into different activities, chosen a cost driver, and measured its usage last year. Her estimates are as follows:

The costs from last year appear to be good estimates of costs in the coming year.
The 20 kilometers of county road available to bid on will require 30,000 hours of surveying, 300,000 tons of earth moved, 10 bridges, and 80,000 tons of gravel.

a. Allowing for a 10 percent profit, what should be the road contractor’s bid using the \($3\) million per kilometer cost driver?

b. What is wrong with using kilometers as a cost driver?

c. Allowing for a 10 percent profit, what should be the road contractor’s bid using the multiple cost drivers suggested by the accountant?

Transcribed Image Text:

Hours Tons of earth moved Number of bridges Number of kilometers Tons of gravel Number of kilometers Cost Driver Usage 200,000 hours 2,000,000 tons 60 bridges 200 kilometers 750,000 tons 200 kilometers Activity Costs ($ millions) Cost Driver Surveying 10 Excavating 200 Bridges 120 Grading 80 Gravel 30 Paving 160