Bids have been called for the fabrication of a steel Watergate, and Stenson Steel is in the process of preparing to bid on this contract. The practice in your company has been to charge each contract with bid preparation costs of $2,000, which is actually about three times the actual value of time and office supplies spent on each bid but is costed this way because the company is the successful bidder only once in every three times it bids, on average. The bidding policy in the past has been to add a 15 percent margin to the incremental and allocated costs, and hence your colleague, a recent M.B.A. graduate from a rival university, insists that the appropriate bid price is $138,230, calculated as follows:

You are a little worried that conditions in the industry have deteriorated recently. You are aware that some of your competitors have been operating below capacity, and you suspect that demand for steel-fabricated products is likely to be depressed for the coming twelve months.

(a) What is the absolute minimum price you would bid on this contract? Explain and defend your answer.

(b) On the basis of the information given, what bid price would you recommend?

(c) What factors would you wish to investigate and evaluate before choosing the actual bid price?

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Bid preparation costs Direct materials Direct labor Variable overhead $ 2,000 18,600 33,200 14,400 Fixed overhead 52,000 Profit margin 18,030 Suggested bid price $138,230