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Contingency Allowance

Contingency Allowance:

A company is developing a new cell phone and is trying to determine cost estimates for parts and labor for each phone. The target retail price for the new cell phone is $165.00 per unit and the markup required by retailers is 75%.

Taking all this into consideration along with the component cost information and estimating criteria below:
(a) What contingency cost budget would be best suited for the product?
(b) What rationale would be used for acceptance or rejection of the project?
(c) What recommendations can be made in regards to the cost estimates?

Item Cost Estimate Type of Estimate
Case $10.00 Order of Magnitude
Handset $12.00 Definitive
Labor $2.00 Definitive
Speaker $2.50 Budget
Mouthpiece $5.50 Budget
Antenna $1.70 Definitive
Keypad $3.00 Order of Magnitude
Circuit boards
(handset) $6.50 Budget
Circuit boards
(base unit) $8.50 Definitive
Battery $1.20 Order of Magnitude
Charger $16.00 Order of Magnitude
Total $68.90 NA

The estimating department currently defines estimate accuracy as follows:

Order of Magnitude: -25%, +75%
Budget: -10%, +25%
Definitive: -5%, +10%

Solution Preview

a). Order of Magnitude Costs = 1.75(10+3+1.20+16) = $52.85
= 1.25(2.50+5.50+6.50) = $18.13
Definitive = ...

Solution Summary

What contingency cost budgets would be best suited for the product is determined. Recommendations for cost estimates are determined.