Instructions: Please complete all 3 multi-part problems for this week’s assignment.
2-1 Basic Estimating Problem
Your company is installing a new piece of machining equipment and a robotic arm. Your manager asks for the project costs by cost category as well as the total amount. Given the following information, develop a base cost estimate by grouping costs by Equipment / Material (items 1 – 4), Installation / Labor (items 5 and 6), and Overhead (items 7-9).
Note: For this problem, only items 5 and 6 are considered “labor” for the purpose of calculating items 8 and 9.
2-2 Three-point Estimate Problem
(a) A project requires the use of structural steel in several tasks over the 12 month period expected to complete the work. Based on recent experience the most likely price for the material is $0.30/lb. There are, however, price fluctuations over time based on suppliers used and structural steel availability. The most optimistic price estimate is $0.24/lb., and the most pessimistic estimate is $0.62/lb.
Use the three-point estimating process to determine the expected price of the material.
(b) In addition to price fluctuations, it is also uncertain how much of structural steel will be required for the project. Design uncertainties and waste at the project site will affect the amount of structural steel actually needed. The most likely amount required is 40 tons. However, as little as 37 tons and as much as 49 tons might be required. One ton = 2000 lbs.
Use the three-point estimating process to determine to determine the expected amount of structural steel needed for the project?
(c) Using the estimates from 1 & 2, what is the expected cost for structural steel over the life of the project?
(d) Using the “Complex” three-point method, what is the expected cost for structural steel over the life of the project?
Expected price = $0.34 per pound
Expected usage = 41 tons
Expected total cost (simple method) = $28,153 ($27,880 using rounded numbers)
Expected total cost (complex method) = $31,856 ($31,673 using rounded numbers)
2-3 Contingency Allowance Problem
You are a project manager for Cowboy Bill’s Sandwich shop, a wholesale sandwich maker, and have been asked to manage the introduction of a new buffalo sandwich. Listed below are the initial cost estimates for the ingredients and labor for 1000 sandwiches delivered to the retail outlets:
|TYPE OF ESTIMATE|
|Buffalo||$80.00||Order of Magnitude (market price)|
|Lettuce||$15.00||Definitive (own farms)|
|Tomatoes||$12.00||Definitive (own farms)|
|Pickles||$7.00||Budget (existing supplier)|
|Corn Starch||$5.50||Budget (existing supplier)|
|Mustard||$3.70||Definitive (in stock item)|
|Buffalo special sauce||$3.00||Order of Magnitude (new product)|
|Aromatic Herbs||$6.50||Budget (existing supplier)|
|Semi toxic food preservative||$1.50||Definitive (in stock item)|
|Labor||$6.00||Order of Magnitude (Buffalo preparers an unknown quantity)|
|Packing and shipping||$18.00||Definitive (same as current product)|
The target retail price for the new sandwich is $1.49 each. This is the cost the retailer thinks they can sell the sandwich and still make money. The average markup from Bill to the Retailer is 150%. New products are targeted for 100% markup by the Retailer to the consumer on introduction, so that price and cost reductions can be taken as required by competitive pressure and still keep the product profitable.
Cowboy Bill’s Sandwich shop’s estimating department currently defines estimate accuracy as follows:
Order of Magnitude -25%, +50%
Budget -10%, +20%
(a) After applying the appropriate estimate contingency adjustments, what is the cost per sandwich?
(b) After applying your mark-up to the retailer and the retailer’s mark-up to the end consumer, what is the cost per sandwich (i.e. the “Retail Price”)?
(c) If we wish to minimize risk as related to the cost of the product, will the project be approved?
(d) What would you recommend to reduce or eliminate any contingency from the budget?