Drew Mellow builds custom homes in Miami. Mellow was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows:

Mellow 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 Mellow accept the client's offer? Why?
B. If Mellow has more business than he can handle, how much should he be willing to accept for the home? Why?

Question

Drew Mellow builds custom homes in Miami. Mellow was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows:
  
Mellow 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 Mellow accept the client's offer? Why?
B. If Mellow has more business than he can handle, how much should he be willing to accept for the home? Why?

Quizplus · Accepted Answer

The Answer of Drew Mellow builds custom homes in Miami. Mellow was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows:
  
Mellow 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 Mellow accept the client's offer? Why?
B. If Mellow has more business than he can handle, how much should he be willing to accept for the home? Why?

Drew Mellow Builds Custom Homes in Miami