Question - George Jettson builds custom homes in Cincinnati. Jettson was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows:
Land $90,000
Construction material $120,000
Subcontractor labor costs $150,000
$360,000
Construction overhead 20% of direct costs $72,000
Allocated corporate overhead $40,000
Total Cost $472,000
Jettson adds a 25% profit margin to all jobs, computed on the basis of total cost. In this client's case the profit margin amounted to $118,000 ($472,000 × 25%), producing a bid price of $590,000. Assume that 60% of construction overhead is fixed.
Required:
A. Suppose that business is presently very slow, and the client countered with an offer on this home of $455,000. Should Jettson accept the client's offer? Why?
B. If Jettson has more business than he can handle, how much should he be willing to accept for the home? Why?