7. The use of cost in pricing decisions Paulo Baldwin has worked as a painter fo

Question

7. The use of cost in pricing decisions

Paulo Baldwin has worked as a painter for years and has decided to go into business on his own as Paulo's Painting. Paulo's town is asking for bids on a project to paint the town hall, and Paulo plans to price the job using a 25% markup on project-related variable costs. Paulo wants to make sure he covers his costs and makes a profit.

Paulo has gathered estimates of costs for the project. He must also consider the costs of owning his own business. His estimated costs are summarized in the following table:

                         Paulo's Painting Town Hall Project Estimated Costs

Please complete the fill in blank for the following four questions:

A. What will Paulo bid for the town hall project if he uses a 25% markup on project-related variable costs?_____

B. What is Paulo's estimated profit on the town hall project if he wins with this bid?_______

      The town hall project will give Paulo a lot of exposure in town, and he wants to make sure that his pricing is competitive. Town records show that similary sized painting projects did not exceed $9000, so Paulo is considering changing his bid. He will still aim for the same amount of profit and will budget his costs accordingly.

C. Using this target pricing method, what will Paulo bid for the town hall project?________

D. What is the target cost for the town hall project with this bid and Paulo's plan to achieve the same profit? ______

Estimated cost of paint and supplies $1000 Estimated labor cost $6500 Depreciation on the company van $800 Start-up costs, including company stationery and advertising $550

Explanation / Answer

Answer A. Paulo Bid price is $9375 Project related Variable Costs Cost of Supplies 1000 Labour Costs 6500 Total Variable Costs 7500 Profit - 25% 1875 Total Bid Pice 9375 Answer B. Paulo's Estimated profit - $1875 (See working above) Answer C. Under Target Pricing Method, Paulo's Bid is $9000 Answer D. Target Cost of Hall Project to achieve the Same Profit (25% Mark Up) is -$7200 Target Cost = $9000 (Bid Price)/125 X 100 = $7200

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