EXERCISE 8-21 (CONTINUED)

4. The objectivity of the interview data can be questioned since the on-site

work supervisors were undoubtedly trying to prove their case about the

cost of nonroutine jobs. Nevertheless, the activity-based costing data

certainly suggest that dramatic differences exist in the costs of jobs.

While some of the costs may be difficult to adjust in response to

changes in activity, it does appear that the standard bid of $2,500 per

thousand square feet may be substantially under the company’s cost for

nonroutine jobs. Even though it may be difficult to detect nonroutine

situations before work begins, the average additional cost of $6,430 for

nonroutine work suggests that the estimator should try. And if a non-

routine situation is spotted, this should be reflected in the bid price.

Savvy competitors are likely to bid less than $2,500 per thousand

square feet on routine work and substantially more than $2,500 per

thousand square feet on nonroutine work. Consequently, Mercer Asbes-

tos Removal may find that its product mix shifts toward nonroutine work

and away from routine work as customers accept bids on nonroutine

work from the company and go to competitors for routine work. This

may have a disastrous effect on the company’s profits.

Problem 8-28 (20 minutes)