Problem 1. Basic Estimating Problem
Given the following information, develop a base cost estimate by grouping costs by (Equipment / Material) (items 1 – 4), (Installation/ Labor) (items 5 and 6), and (Overhead).
1. Two pieces of equipment costing $ 15,000 and $ 35,000
2. Material required for electrical hook-up is 400 feet at $ 25 per foot
3. Controls for each piece of equipment are estimated at $ 600 each
4. Required start-up material is 3,700 pounds at $ 2.70 per pound
5. Company labor for installation requires two maintenance specialists for two days at eight hours per day and $ 35 per hour
6. Contract labor is estimated at a fixed price of $ 7,500
7. Engineering is estimated to be 15% of (equipment / material) cost based on past experience
8. Inspection is estimated to be 3% of (labor) cost based on past experience
9. General and Administrative expenses are estimated to be 5% of the total of (equipment / material) and (labor cost) based on past experience.
Note: only items 5 and 6 are considered labor for the purpose of calculating items 8 and 9.
Problem 2: Three-point estimate:
(a) A project requires the use of structural steel in several tasks over the 12 month period expected to complete the work. Based on recent experience the most likely price for the material is $0.30/lb. There are, however, price fluctuations over time based on suppliers used and structural steel availability. The most optimistic price estimate is $0.24/lb., and the most pessimistic estimate is $0.62/lb.
What is the expected price of the material?
(b) In addition to price fluctuations, it is also uncertain how much of structural steel will be required for the project. Design uncertainties, and waste at the project site, will affect the amount of structural steel actually needed. The most likely amount required is 40 tons. However, as little as 37 tons and as much as 49 tons might be required. One ton = 2000 lbs.
What is the expected amount of structural steel needed for the project?
(c) Using the estimates from 1 & 2, what is the expected cost for structural steel over the life of the project?
Problem 3: Contingency Allowance:
You are a project manager for Cowboy Bill’s Sandwich shop, a wholesale sandwich maker, and have been asked to manage the introduction of a new buffalo sandwich. Listed below are the initial cost estimates for the ingredients and labor for 1000 sandwiches delivered to the retail outlets:
|
PRODUCT COMPONENT
|
COST
ESTIMATE
|
TYPE OF ESTIMATE
|
|
Buffalo
|
$80.00
|
Order of Magnitude (market price)
|
|
Lettuce
|
$15.00
|
Definitive (own farms)
|
|
Tomatoes
|
$12.00
|
Definitive (own farms)
|
|
Pickles
|
$7.00
|
Budget (existing supplier)
|
|
Corn Starch
|
$5.50
|
Budget (existing supplier)
|
|
Mustard
|
$3.70
|
Definitive (in stock item)
|
|
Buffalo special sauce
|
$3.00
|
Order of Magnitude (new product)
|
|
Aromatic Herbs
|
$6.50
|
Budget (existing supplier)
|
|
Semi toxic food preservative
|
$1.50
|
Definitive (in stock item)
|
|
Labor
|
$6.00
|
Order of Magnitude (Buffalo preparers an unknown quantity)
|
|
Packing and shipping
|
$18.00
|
Definitive (same as current product)
|
|
Total cost
|
$158.20
|
NA
|
The target retail price for the new sandwich is $1.49 each. The average discount to resellers is 150%. New products are targeted for 100% markup on introduction, so that price and cost reductions can be taken as required by competitive pressure and still keep the product profitable.
Note: the discount to the retailer is what the Bill’s marks the product up to sell to the retailer. The targeted mark up is the amount the retailer will mark up from their cost to get the price to the final customer.
Cowboy Bill’s Sandwich shop's estimating department currently defines estimate accuracy as follows:
Order of Magnitude -25%, +50%
Budget -10%, +20%
Definitive -5%, +5%
(a) What cost budget do you recommend for the product?
(b) If we wish to minimize risk as related to the cost of the product, will the project be approved?
(c) What would you recommend to reduce or eliminate any contingency from the budget?
(d) What are the considerations when using this process to make the final decision on a project?