Nash Bridges Construction Company is a building contractor serving the Gulf Coas

Question

Nash Bridges Construction Company is a building contractor serving the Gulf Coast region.The company recently bid on a Gulf-front causeway improvement in Biloxi, Mississippi.Nash Bridges has incurred bid development and job cost-out expenses of $25,000 prior to submission of the bid.The bid was based on the following projected costs:






Cost Category







Amount








Bid development and job cost-out expenses







$25,000








Materials







881,000








Labor (50,000 hours @ $26)







1,300,000








Variable overhead (40% of direct labor)







520,000








Allocated fixed overhead (6% of total costs)







174,000








Total costs







$2,900,000









A.What is Nash Bridges

Explanation / Answer

Solution: A. Because the $25,000 bid development and job cost-out expenses were incurred prior to submission of the bid, they are sunk costs and irrelevant in determining a minimum acceptable contract price. When operating at peak capacity, the company is fully employed and able to obtain prices covering fully allocated costs. Thus, assuming the company is operating at peak capacity, all non-sunk costs are relevant and a minimum acceptable bid price is $2,875,000 + e (=$2,900,000 - $25,000). In particular, note that the 6% fixed overhead charge is relevant as it represents an opportunity cost of turning away other profitable business. B. Assuming an economic downturn has left the company with substantial excess capacity, neither the $25,000 sunk development expense nor the 6% fixed overhead charge are relevant. When operating at less than peak capacity, the minimum acceptable contract price is determined solely by the level of incremental costs. Here, the minimum acceptable contract price off-peak is $2,701,000 + e (=$2,900,000 - $25,000 - $174,000). Any price above that level will make a positive contribution to overhead and should be accepted.

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