Ahmed constructs buildings in Abu Dhabi. Ahmed was approached recently by a customer regarding a potential project,
Question:
Ahmed constructs buildings in Abu Dhabi. Ahmed was approached recently by a customer regarding a potential project, and he submitted a bid of $967,600, derived as follows:
Land | $160,000 |
Raw materials | 200,000 |
Labor costs | 240,000 |
$600,000 | |
Construction overhead—25% of direct costs | 150,000 |
Allocated corporate overhead | 70,000 |
Total cost | $820,000 |
Ahmed adds an 18% profit margin to all jobs, computed on the basis of total cost. In this client's case the profit margin amounted to $147,600 ($820,000 x 18%), producing a bid price of $967,600. Assume that 70% of construction overhead is fixed. If Ahmed has more business than he can handle, how much should he be willing to accept for the home? Why?
Cornerstones of Managerial Accounting
ISBN: 978-0176530884
2nd Canadian edition
Authors: Maryanne M. Mowen, Don Hanson, Dan L. Heitger, David McConomy, Jeffrey Pittman