You operate your own small building company and have decided

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.

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.

Issue

Rival A

Rival B

Rival C

Capacity utilization

At full capacity

Moderate

Very Low

Goodwill Considerations

Very concerned

Moderately concerned

Not concerned

Productions 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 cost 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 shows 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

Issue	Rival A	Rival B	Rival C
Capacity utilization	At full capacity	Moderate	Very Low
Goodwill Considerations	Very concerned	Moderately concerned	Not concerned
Productions 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 cost 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 shows 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

Solution

Rival A

IC = 268,000 (10%) = 26,800 + 268,000 = 294,800

Bid = 294,800 (35%) = 103,180 + 294,800 = 397,980

Bid = 294,800 (50%) = 147,400 + 294,800 = 442,200

Bid = $397,980 - $442,200

Rival B

IC = $268,000Full cost = $440,000

Bid = 440,000 (8%) = 35,200 + 440,000 = 475,200

Bid = 440,000 (12%) = 52,800 + 440,000 = 492,800

Bid = $475,200 - $492,800

Rival C

IC = 268,000 (20%) = 53,600 + 268,000 = 321600

Bid = 440,000 (10%) = 44,000 + 440,000 = 484,000

Bid = 440,000 (15%) = 66,000 + 440,000 = 506,000

Bid = $484,000- $506,000

Your Bid

IC = 268,000

Bid = 268000 (60%) = 160800 + 268000 = 428800

Bid = 268000 (80%) = 214400 + 268000 = 482400

Bid = $428800 - $482400

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

Any bid between $428800 - $482400 must win the project. As the rival A does not like winter jobs or dirty jobs and have small and inefficient plant. Rival B does not like messy or inconvenient jobs and the job is in national Park and the bid is higher than your bid. Rival C bids much higher than you do.

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

To maximize the expected value of the contribution from this contract you must bid above $482400. By bidding higher than $482400, you would be able to earn more.