Question

Your company is considering whether it should tender for two contracts (MS1 and MS2) on offer
from a government department for the supply of certain components. The company has three
options:
• Tender for MS1 only; or
• Tender for MS2 only; or
• Tender for both MS1 and MS2.
If tenders are to be submitted the company will incur additional costs. These costs will have to be
entirely recouped from the contract price. The risk, of course, is that if a tender is unsuccessful
the company will have made a loss.
The cost of tendering for contract MS1 only is BWP50, 000. The component supply cost if the
tender is successful would be BWP 18,000.
The cost of tendering for contract MS2 only is BWP 14,000. The component supply cost if the
tender is successful would be BWP 12,000.
The cost of tendering for both contracts MS1 and contract MS2 is BWP 55,000. The component
supply cost if the tender is successful would be BWP 24,000.
For each contract, possible tender prices have been determined. In addition, subjective
assessments have been made of the probability of getting the contract with a particular tender
price as shown below. Note here that the company can only submit one tender and cannot, for
example, submit two tenders (at different prices) for the same contract.

Option Possible Tender Price (BWP) Probability of getting contract
MS1 only 130, 000 0.20
115, 000 0.85
MS2 only 70, 000 0.15
65, 000 0.80
60, 000 0.95
MS1 and MS2 190, 000 0.05
140, 000 0.65
In the event that the company tenders for both MS1 and MS2, it will either win both contracts (at
the price shown above) and no contract at all.
• What do you suggest the company should do and why?
• What are the downside and the upside of your suggested course of action?
• A consultant has approached your company with an offer that in return for BWP 20,000
in cash she will ensure that if you tender BWP 60,000 for contract MS2 only your tender
is guaranteed to be successful. Should you accept her offer or not and why?

Answer 1