Q27E_c - Horngren'S Financial And Managerial Accounting

Question

Chance Realtors, a real estate consulting firm, specializes in advising companies on potential new plant sites. The company uses a job order costing system with a predetermined overhead allocation rate, computed as a percentage of direct labor costs.

At the beginning of 2018, managing partner Andrew Chance prepared the following budget for the year:

Direct labor hours (professionals)	13,750 hours
Direct labor cost (professionals)	$2,200,000
Office rent	330,000
Support staff salaries	1,200,000
Utilities	450,000

Maynard Manufacturing, Inc. is inviting several consultants to bid for work. Andrew Chance wants to submit a bid. He estimates that this job will require about 180 direct labor hours.

Requirements

3. If Chance wants to earn a profit that equals 25% of the job’s cost, how much

should he bid for the Maynard Manufacturing job?

 

Step-by-Step Solution

Answer

The Bid amount for the maynard manufacturing job is $68,400

Step 1: Calcualation of profit margin

$\begin{array}{c}\mathrm{Profit}=\mathrm{Totalpredictedprice}\times \mathrm{Profitmarginratio}\\ =\$54,720\times 25\%\\ =\$13,680\end{array}$

Step 2: The Bid price for the maynard manufacturing job

$\begin{array}{c}\mathrm{Bidprice}=\mathrm{Totalpredictedcost}+\mathrm{Profit}\\ =\$54,720+\$13,680\\ =\$68,400\end{array}$