Reference no: EM132091272

Question - George Jettson builds custom homes in Cincinnati. Jettson was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows:

Land $90,000

Construction material                                    $120,000

Subcontractor labor costs                              $150,000

                                                                  $360,000

Construction overhead 20% of direct costs     $72,000

Allocated corporate overhead                        $40,000

Total Cost                                                    $472,000

Jettson adds a 25% profit margin to all jobs, computed on the basis of total cost. In this client's case the profit margin amounted to $118,000 ($472,000 × 25%), producing a bid price of $590,000. Assume that 60% of construction overhead is fixed.

Required:

A. Suppose that business is presently very slow, and the client countered with an offer on this home of $455,000. Should Jettson accept the client's offer? Why?

B. If Jettson has more business than he can handle, how much should he be willing to accept for the home? Why?