1. Your company, Bright Paints, is one of a dozen companies manufacturing a spec
ID: 1184545 • Letter: 1
Question
1. Your company, Bright Paints, is one of a dozen companies manufacturing a special reflective paint used for traffic signs. The State Department of Transportation has called for tenders to supply 10,000 gallons of blue reflective paint to be delivered within two months. You can foresee fitting in a production run of the blue paint and have decided to bid on the job. You calculate your incremental costs for this job to be $76,200. This particular contract is standard, similar in all in respects to hundreds of contracts you have bid on over the past few years. Your pricing policy has been to apply a mark-up to incremental costs to arrive at the bid price. Your mark-up has been higher when you had plenty of orders and lower when you had few or no orders to fulfill. You have assembled data relating the mark-up rate used and the percentage of contracts won at each mark-up rate, as follows. Mark-up rate (%) Percentage of contracts won at that rate (%) 0 95.9 10 84.8 15 65.4 20 41.3 25 15.7 30 3.0 35 0. a. Why would your company have bid with a zero mark-up on some past tenders? Why didnExplanation / Answer
Bright Paints can not be expected to win contract with a 0% markup rate because other firms may also be bidding with low or zero markup rates. This could be because for them also the probability of winning is highest when markup is 0%. However such Fixed price contracts can hurt profitability if Input costs increase & there is no markup to cushion price increases.
Each tender is different in terms of the considerations. A 0% markup leads to highest % of bids won. This can also mean that Input costs are higher than competition. So Bright paint has to look at its incremental costs to identify such costs & exlore ways to reduce them to become competative.
Winning a tender is not only about the price at which Bright bids, but also the rivals bidding stargety, size of rivals buisness etc.
b. Calculate the NPVC at each markup rate.
MARK UP
BID= COST+MARK UP
% WON
EXPECTED
0
76200
0.959
73075.8
10
83820
0.848
71079.36
15
87630
0.654
57310.02
20
91440
0.413
37764.72
25
95250
0.157
14954.25
30
99060
0.03
2971.8
35
102870
0.00
0.0
Expected contribution at every level of mark up= % of winning*(cost +markup)
A markup rate of 0% will maximize expected contribution.
c. Fixed price bidding is best for this type of contract because Bright Paints has sufficient experience to know the costs with a high probability of accuracy. The buyer would naturally prefer a fixed price bid because of the lower risk. But risk for Bright is high as inputs costs increase can affect its profitability. So Bidding with 0% markup is suicidal & not recommended
2.. Since the occurrence of the lawsuit is uncertain we need to arrive at an expected value of the cost of the lawsuit. This is derived by multiplying the cost of the lawsuit with the probability of the cost. Adding all such possibilities corresponding to different values of the cost gives us expected cost. This expected cost can be used in all calculations as the cost of the lawsuit.
This cost is then deducted from expected revenues to arrive at expected revenues.
MARK UP
BID= COST+MARK UP
% WON
EXPECTED
0
76200
0.959
73075.8
10
83820
0.848
71079.36
15
87630
0.654
57310.02
20
91440
0.413
37764.72
25
95250
0.157
14954.25
30
99060
0.03
2971.8
35
102870
0.00
0.0
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.