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.

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

Answer 1

Solution :

A
Total allocated cost for the project = 440,000 Incremental cost = 268,000 Let's say we add 79% to incremental costs Sol 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 795 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 ratio to calculate the price.

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