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 COMPONENT COST
ESTIMATE 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)
Total cost $158.20 NA
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?
Retail price based upon contingency budget = $1.05