Problem 2 You operate your own small building company and have decided to bid on
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Question
Problem 2 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
a. What price would you bid if you must win the project?
b. What price would you bid if you want to maximize the expected value of the contribution from this contract?
c. Defend your answers with discussion, making any assumptions you feel are reasonable and/or are supported by the information provided.
(Please show all your calculations and process. Discuss your answer in three-five complete sentences.)
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
Explanation / Answer
Solution
a.))
From the previous bid patterns of all the rivals, it is observed that the highest bid by any rival is 506000. Now, my bidding pattern suggests of adding 60 to 80% of my incremental cost. My usual practice suggests that the maximum I can bid is 482400 which is still less that the highest bid. Therefore to win the bid I must bid 506000.
b.))
If you want to maximize the expected value of the contribution from this contract, I must bid the minimum. My fully allocated cost is 440000. Therefore I must bid the same to maximize the value of contribution from the contract.
c.))
It is said that in the first part, that my company want to win the bid. Therefore it has to bid the maximum. Now, from the bidding practices of the rivals it is observed that Rival C can bid a maximum of 506000. To win the contract I will also bid the same. At the same bid I will win because my capacity utilization is moderate while C
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