Case Teaneck

Topics: Costs, Variable cost, Marginal cost Pages: 4 (991 words) Published: December 2, 2011

Teaneck is a small organization with 90% of its peso volume obtained from contracts for municipal work. Management decided to submit a bid for the construction in April of a mile-long extension to the main sewer system in a nearby town which until now has used septic tanks. The bidding is expected to be competitive because whoever gets this contract will have some advantage in obtaining a contract to be awarded by the town later in the year worth about P50 million. In order to submit the most competitive bid possible, the project managers of Teaneck decided to evaluate the alternatives of using one, two or three work shifts.

Table 1 shows time and cost estimates of Teaneck’s engineers. The trunk sewer extension is to be laid in a tunnel for 1/3 its length; the remaining 2/3 is to be constructed in trenches. To build the tunnel, a primary shaft must be excavated first, then the secondary shafts can be driven and the tunnel can be dug simultaneously. The trench is to be started at the same time as the primary shaft. Another crew of workers follows the trench workers, laying pipes, pouring concrete and refilling trenches as far as they have been excavated. The excavators lose no time as a result of this follow up. A third group would be performing a similar function in the tunnel.

Teaneck’s direct labor is hired from union pools. There is a strong chance that the local Excavators Union will strike on the project’s inception date which may seriously affect its profitability. At a meeting of the project managers, there was a consensus to use 80% probability of such a strike for planning purposes. With a strike, direct costs would remain unchanged, since the issue involved was not one of wages; but indirect costs would accrue for the duration of the strike at the same daily rate as indicated in Table 1. General and administrative costs are put at 40% of the sum of direct and indirect costs. Normally, Teaneck aims at...
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