You are reviewing a cost proposal, which includes an $800,200 direct material estimate. After material items, but you also note that 20 high-cost items account for $620,000 of the total. The remaining $180,200 is spread across 480 relatively small purchases.
- Examination of the 20 high cost items (estimated at $620,000) shows that all are properly priced except one item. That item is overpriced by $20,000. What should be your objective for these 20 items?
- After analyzing a sample of the remaining 480 items, you find that the sample is overpriced by 6%. Using this 6% decrement factor, what cost should you estimate for those items? Remember that the average sample item cost is 106%of what it ought to be.
- Given your answers to questions 1 and 2, what should you estimate for total material cost?