Budgeting and order of magnitude
You have been requested to provide a contingency estimate for a project involving the manufacturing of a new television. You are provided with the following component and labor estimates, together with the type of estimate:
Description Estimated base cost Type of estimate
Plasma Screen $780.00 Order of Magnitude
Tuner $107.00 Definitive
Sound circuits $45.00 Definitive
Controls $65.00 Order of Magnitude
Case $142.00 Budget
Labor $245.00 Definitive
The target retail price for the new TV is $4,995.00. New products are targeted for 130% markup on introduction, so that price and cost reductions can be taken as required by competitive pressure and still keep the product profitable.
Your estimating department currently defines estimate accuracy as follows:
Order of Magnitude -25%, +55%
Budget -10%, +35%
Definitive -5%, +10%
(a) What cost budget do you recommend for the product?
(b) Will the project be approved?
(c) What would you recommend to reduce or eliminate any contingency from the budget?