Case Study - Bid Pricing

Richard Moby was approached recently by the city of Sydney about building a new marina for moderate-sized sailing vessels. Moby decided that his company's Marine Services Division should submit a bid on the job. The Marine Services Division specializes in marina maintenance and construction. The city announced that three other firms also would be submitting bids. Since all four companies were equally capable of building the marina to the city's specifications, Moby assumed that the bid price would be the deciding factor in selecting the contractor. Moby consulted with the controller and chief engineer of the Marine Services Division, and the following data were compiled (all amounts in US$).

Estimated direct-labor requirements, 1,500 hours at $12.00 per hour	18,000
Estimated direct-material requirements	30,000
Estimated variable overhead (allocated on the basis of direct labor) 1500 direct-labor hours at $5.00 per hour	7,500
Total estimated variable costs	55,500
Estimated fixed overhead (allocated on the basis of direct labor) 1500 direct-labor hours at $8.00 per hour	12,000
Estimated total cost	67,500

The Marine Services Division allocates variable-overhead costs to jobs on the basis of direct- labor hours. These costs consist of indirect-labor costs, such as the wages of equipment- repair personnel, gasoline and lubricants, and incidental supplies such as rope, chains, and drill bits. Fixed-overhead costs, also allocated to jobs on the basis of direct-labor hours, include such costs as workers' compensation insurance, depreciation on vehicles and construction equipment, depreciation of the division's buildings, and supervisory salaries.

It was up to Richard Moby to decide on the bid price for the marina. In his meeting with the divisional controller and the chief engineer, Moby argued that the marina job was important to the company for two reasons. First, the Marine Services Division had been operating well below capacity for several months. The marina job would not preclude the firm from taking on any other construction work, so it would not entail an opportunity cost. Second, the marina job would be good advertising for Sydney Sailing Supplies. City residents would see the firm's name on the project, and this would promote sales of the company's boats and sailing supplies. Based on these arguments, Moby pressed for a bid price that just covered the firm's variable costs and allowed for a modest contribution margin. The chief engineer was obstinate, however, and argued for a higher bid price that would give the division a good profit on the job. "My employees work hard to perform an outstanding job, and their work is worth a premium to the city," was the engineer's final comment on the issue. After the threesome tossed the problem around all morning, the controller agreed with Moby. A bid price of $60,000 was finally agreed upon.

Required

Critique the case and make a well-reasoned argument whether the bid price was reasonable or not in your opinion.