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Managerial Accounting: Excess Capacity

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Mission Roofing performs roofing services for commercial clients. The company recently submitted a bid of $371,000 to the Shawnee School System, computed as follows:

Mission adds a 20% profit margin to all jobs, computed on the basis of total direct cost. In Shawnee's case the profit margin amounted to $50,000 ($250,000 20%), producing a bid price of $371,000. Assume that 60% of construction overhead is fixed.

Required:

A. If Mission had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can Mission justify this amount?
B. If Mission had no excess capacity, what would be the lowest price that the company should charge?
C. What is the primary benefit and problem of approaching a competitive bid situation with a low-bid philosophy?

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Solution Summary

This solution provides a detailed explanation of the given accounting questions.

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Total value of bid 371000
less:total direct costs 250000
121000
less: profit 50000
total overhead 71000
less: fixed overhead 42600
variable overhead 28400

A. If Mission had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can Mission justify this amount?

If the Mission had excess ...

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