Cost Analysis in a Service Organization Pat MacDonald, an independent engineer, has been invited to bid on a contract engineering project. Pat is not the only bidder on the project and wants the bid only if it will return an adequate profit for the time and effort involved. The contract calls for 250 hours of Pat's time. The following cost data have been extracted from Pat's records and are not expected to change for the contract period.

The hourly rate for the office costs, secretary, etc. is based on a fixed cost of $1,140 per week divided by the 30 billable hours per typical week. Billable hours represent the time which Pat can charge to clients. However, these costs are fixed regardless of the number of hours Pat works per week. Under the contract, the travel and other expenses will be the same as for normal consulting.

What is the relevant "cost" for Pat's bid under each of the following independent situations? Support your chosen cost basis.

a. Pat will work on the contract during hours that would otherwise not be billable to other clients.

b. Pat will give up work for other clients to meet the time requirements under the contract. No ill will would be generated as a result of accepting the contract.

c. Pat believes that the contract would be the start of a long-term business relation- ship that could take up most of Pat's time. The initial bid would have to be close to the amount charged on subsequent projects. While Pat has the time now to take the project without giving up clients, eventually Pat would have to give up some other clients

Transcribed Image Text:

Per Hour Normal consulting rate Office costs, secretary, etc. $100 (38) Travel, other variable costs (22) Normal "profit" per hour $ 40 Billable hours (typical week) 30