Contingency Allowance:
You are a project manager for the development of Motorola's new 4G, HD, Touch Screen Cell Phone which is supposed to take the cell phone industry by storm. Listed below are the initial cost estimates for the materials and labor for one of the phones:
|
ITEM
|
COST
ESTIMATE
|
TYPE OF ESTIMATE
|
|
Case
|
$20.00
|
Order of Magnitude
|
|
Handset
|
$12.00
|
Definitive
|
|
Labor
|
$2.00
|
Definitive
|
|
Speaker
|
$2.50
|
Budget
|
|
Mouthpiece
|
$5.50
|
Budget
|
|
Antenna
|
$1.70
|
Definitive
|
|
Keypad
|
$3.00
|
Order of Magnitude
|
|
Circuit boards (handset)
|
$6.50
|
Budget
|
|
Circuit boards (base unit)
|
$8.50
|
Definitive
|
|
Battery
|
$1.20
|
Order of Magnitude
|
|
Charger
|
$16.00
|
Order of Magnitude
|
|
Total cost
|
$78.90
|
NA
|
The estimating department currently defines estimate accuracy as follows:
|
Order of Magnitude
|
-25%, +85%
|
|
Budget
|
-10%, +25%
|
|
Definitive
|
-5%, +10%
|
(a) What contingency cost budget do you recommend for the product?
(b) The target retail price for the new telephone is $165.00 per unit. The markup demanded by retailers is 50%. Based on cost factors, write a brief rationale for acceptance or rejection of the project, including any recommendations you have regarding the cost estimates.