Paul Moroney has worked as a painter for years and has decided to go into busine
ID: 2476114 • Letter: P
Question
Paul Moroney has worked as a painter for years and has decided to go into business on his own as Paul's Painting. Paul's town is asking for bids on a project to paint the town hall, and Paul plans to price the job using a 30% markup on project-related variable costs. Paul want to make sure he covers his costs and makes a profit.
Paul has gathered estimates of costs for the project. He must also consider the costs of owoning his own business. His estimated costs are summarized in the following table:
Estimated cost of paint and supplies $1,500
Estimated labor cost $6,500
Depreciation on the company van $1,000
Start-up costs, including company stationery and advertising $200
What will Paul bid for the town hall project if he uses a 30% markup on project-related variable costs?
What is Paul's estimated profit on the town hall project if he wins with this bid?
The town hall project will give Paul a lot of exposure in town, and he wants to make sure that his pricing is competitive. Town records show that similarly sized painting projects did not exceed $10,000, so Paul is considering changing his bid. He will still aim for the same amount of profit and will budget his costs accordingly.
Using this target pricing method, what will Paul bid for the town hall project?
what is the target cost for the town hall project with this bid and Paul's plan to achieve the same profit?
Explanation / Answer
1) Paul estimated profit = 30% X Variable cost = 30% X ( 1,500 + 6,500 ) = 2,400
Note : Depreciation is a fixed cost and Start-up cost is sunk cost
2) Painting price wil not exceed 10,000 and he still wants to earn 2,400 of profit so his target cost should not be more than
= 10,000 - 2,400
= 7,600
so his bid shuld not be more than 10,000 and to achieve is target cost he has to low down its labor cost & material cost as depreciation and start up cost can not be effected.