Question

Mason Industries is a custom manufacturer of circuit boards. Clearwater has been asked to prepare a bid for a customer. Clearwater’s bidding policy is to add a 30% markup to the sum of materials, labor, and overhead costs. Materials are estimated using the customer’s schematic drawings. Labor is estimated using time-and-motion studies to determine the labor time needed, multiplied by a blended wage rate of $7.50 per hour. Overhead is crudely estimated to be $29.50 per labor hour.

A bid for Acme Weighing Systems is expected to have materials costs of $27.55 and take 5.6 labor hours.

Required:

1. Determine the bid price that Clearwater Industries would provide to its customer, Acme Weighing Systems using the Cost-plus pricing approach. Show calculations. [4 marks]

2. Explain the rationale behind the cost-plus pricing approach. [4 marks]

Answer 1

1. Calculation of bid price that the Clearwater Industries to provide to its customer using Cost-plus pricing approach:

Item	$
Direct materials	$27.55
Direct labor (5.60 labor hours @ $7.50 per hour)	$42
Overheads (5.60 hours @ $29.50 per labor hour)	$165.20
Total costs	$234.75
Add: Markup (30% of costs)	$70.43 ($234.75 x 30%)
Bid price	$305.18 ($23475 + $70.43)

Rationale behind choosing Cost-plus pricing approach:

The rationale behind choosing the Cost-plus pricing approach by the company is that the selling price cannot be less than the cost incurred in manufacturing of the product. If the Bid / Selling price falls below the cost incurred in producing the goods then it will be loss for the company. Hence most of the companies calculate the manufacturing cost in producing such product, because the selling price cannot be set below the cost price. The companies add markup to the costs and set the selling price.

Hence in the given case the cost of circuit board is $234.75 and adding markup of 30% to cost i.e. $70.43, the bid price to be quoted will be $305.18.