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).

- Two pieces of equipment costing $ 15,000 and $ 35,000
- Material required for electrical hook-up is 400 feet at $ 25 per foot
- Controls for each piece of equipment are estimated at $ 600 each
- Required start-up material is 3,700 pounds at $ 2.70 per pound
- Company labor for installation requires two maintenance specialists for two days at eight hours per day and $ 35 per hour
- Contract labor is estimated at a fixed price of $ 7,500
- Engineering is estimated to be 15% of (equipment / material) cost based on past experience
- Inspection is estimated to be 3% of (labor) cost based on past experience
- General and Administrative expenses are estimated to be 5% of the total of (equipment / material) and (labor) based on past experience.

## 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?

## 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:

PRODUCT COMPONENTCOSTESTIMATETYPE OF ESTIMATEBuffalo $80.00Order of Magnitude (market price)Lettuce$15.00Definitive (own farms)Tomatoes$12.00Definitive (own farms)Pickles$7.00Budget (existing supplier)Corn Starch$5.50Budget (existing supplier)Mustard$3.70Definitive (in stock item)Buffalo special sauce$3.00Order of Magnitude (new product)Aromatic Herbs$6.50Budget (existing supplier)Semi toxic food preservative$1.50Definitive (in stock item)Labor$6.00Order of Magnitude (Buffalo preparers an unknown quantity)Packing and shipping$18.00Definitive (same as current product)Total cost$158.20NA

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%

## Definitive -5%, +5%

(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?