Question

You operate your own small building company and have decided to bid on a government contract to build a pedestrian walkway in a national park during the coming winter. The walkway is to be of standard government design and should involve no unexpected costs. Your present capacity utilization rate is moderate and allows sufficient scope to understand this contract, if you win it. You calculate your incremental costs to be $268,000 and your fully allocated costs to be $440,000. Your usual practice is to add between 60% and 80% to your incremental costs, depending on capacity utilization rate and other factors. You expect three other firms to also bid on this contract, and you have assembled the following competitor intelligence about those companies.

Issue

Rival A

Rival B

Rival C

Capacity Utilization

At full capacity

Moderate

Very low

Goodwill Considerations

Very concerned

Moderately concerned

Not concerned

Production Facilities

Small and inefficient plant

Medium sized and efficient plant

Large and very efficient plant

Previous Bidding Pattern

Incremental cost plus 35-50%

Full cost plus 8-12%

Full cost plus 10-15%

Cost Structure

Incremental costs exceed yours by about 10%

Similar cost structure to yours

Incremental costs 20% lower but full costs are similar to yours

Aesthetic Factors

Does not like winter jobs or dirty jobs

Does not like messy or inconvenient jobs

Likes projects where it can show its creativity

Political Factors

Decision maker is a relative of the buyer

Decision maker is seeking a new job

Decision maker is looking for a promotion

Show all of your calculations and processes. Describe your answers in three- to five-complete sentences.

What price would you bid if you must win the project?

What price would you bid if you want to maximize the expected value of the contribution from this contract?

Defend your answers with discussion, making any assumptions you feel are reasonable and/or are supported by the information provided.

Answer 1

Answer:

Given that:

You operate you own building company and have decide to bid on a government contract to build a pedestrian walk way in a national park during the coming winter.

A)

Total allocated cost for the project =440,000

Incremental cost=268,000

Let's say we add 79% to incremental costs

So,

Allocated cost estimate-79%*440000-347600

So,

The price would be=(347600+268000)-615600

B)

To maximize the expected value of contribution,the difference between allocation cost and incremental cost should be maximum.

So,we should add minimum to the incremental cost i.e

61% of 440000-268400

So,

Price-268400+268000-536400

C)

Since between 60% and 80% is added in the incremental value,so the bid price will be calculated at the maximum rate which would be 79%.

Similarly we could add minimum ratio i.e 61% to maximize the expected value of contribution .

Expected value basically is the difference between the gross revenue and material cost.But since only the incremental and allocated value is given ,so we can use expected ration to calculate the price.