Question

A road contractor has been using miles of road constructed as a cost driver. Based on last year's costs, he estimated that he can build a road for $3 million per mile. The county has recently asked him for an estimate to build 20 miles of road. Before making his bid based on his $3 million per mile estimate, he goes to his accountant for advice. The accountant has analyzed last year's cost much differently. She has divided last year's cost into different activities, chosen a cost driver, and measured its usage last year. Her estimates follow: Activity Costs($000,000) Cost Driver Cost Driver Usage Surveying Excavating Bridges Grading Gravel 10 Hours 200,000 hours 2,000,000 tons 60 bridges 200 miles 200 120 80 Tons of earth moved Number of bridges Number of miles Tons of gravel Number of miles 30 160 750,000 tons 200 miles Paving The costs from the last year appear to be good estimates of costs in the coming year. The 20 miles of county road up for bid will require 30,000 hours of surveying, 300,000 tons of earth moved, 10 bridges, and 80,000 tons of gravel Allowing for a 10% profit what should be the road contractor's bid using the $3 million per mile cost driver? What is wrong with using miles as a cost driver? Allowing for a 10% profit, what should be the road contractor's bid using the multiple cost drivers suggested by the accountant?

Answer 1

Particulars	Cost (millions)	Units	perunit (millions)	Cost for 20 Miles
survey	10	200000	0.00005	1.50
excavate	200	2000000	0.00010	30
bridge	120	60	2.00000	20
gravel	30	750000	0.00004	3.2
paving	160	200	0.80000	16
Grading	80	200	0.40000	8
	Total cost			78.70
	10% margin			7.87
	Bidding amount			86.57
	Cost per mile millions			4.3285