Question - Frogs, Inc. Cost-Plus Pricing
Goal: To use the Cost-Plus Pricing method to generate a quote for a new project.
Information: The owners are impressed with your work and the restaurant is still requesting the parking lot project from Frogs, Inc. The owners would like you to provide a formal quote for the clients for the parking lot. They have asked you to use the cost estimates already generated â€" DM and DL from Part 1, MOH for each department calculated in Part 2, and the service department overhead rates computed in Part 3. Use the full cost you calculated in Part 3 question 3. The owners want you to add the 15% minimum rate of return. Since the price originally offered by the customer is too low, you have decided to use the Cost-Plus pricing method to generate your quote.
The manager of the Design Department estimates that 20% of her department's POHR costs come from fixed costs and the remainder comes from variable costs per job. The manager of the Engineering Department estimates that 40% of her POHR costs come from fixed costs. The manager of the Concrete Casting Department estimates that 40% of his POHR costs come from fixed costs and 60% are variable and the owners estimate that half of their POHR costs are fixed and half are variable. We calculated these in Part 2.
Since the client approached the owners, no selling (marketing) costs are incurred. However, you feel that the service costs should be allocated to this job just like any other regular job that Frogs, Inc. does. Finally, the owners believe that this job will require an investment of $50,000 for a larger gravel machine and $15,000 in opportunity costs (i.e. projects that will be lost due to the time being spent working on the parking lot job).
Required:
1. Identify key assumptions: What key assumptions have been made in preparing to generate a quote for this project? What, if any, additional assumptions will you need to make to finish the sales price? Do you feel these assumptions are valid? Explain.
2. Calculate the Unit Production Cost for the Commercial Parking Lot Project requested by Frogs, Inc. client. Remember to charge only the variable costs for the POHR's calculated in Part 2. Assume that the owners have decided to use frogs produced for the Concrete Casting Department, DL Hours for the Engineering Department, and total projects for the Design Department and the Owners.
3. What is the full cost of the parking lot job including the Service OH?
4. Calculate Frogs, Inc's markup percentage for the new project.
5. Using your calculations from questions 2-4, determine the sales price for the special project using the Cost-Plus Pricing Model.
6. Do you think the client will accept the quoted price? Explain.