MARKUP ON COST, COST-BASED PRICING

MARKUP ON COST, COST-BASED PRICING
Walker Construction acts as the general contractor on building projects ranging from $500,000 to $5 million. Each job requires a bid that includes Walker’s direct costs and subcontractor costs as well as an amount referred to as “overhead and profit.” Walker’s bidding policy is to estimate the direct materials cost, direct labor cost, and subcontractors’ costs. These are totaled, and a markup is applied to cover overhead and profit. In the coming year, the company believes it will be the successful bidder on 10 jobs with the following total revenues and costs:
Revenue

$23,580,000
Direct materials
$6,500,000

Direct labor
4,316,000

Subcontractors
8,834,000
19,650,000
Overhead and profit

$ 3,930,000
Required:
1. Given the preceding information, what is the markup percentage on total direct costs?
2. Suppose Walker is asked to bid on a job with estimated direct costs of $980,000. What is the bid? If the customer complains that the profit seems pretty high, how might Walker counter that accusation?