Problem 44 Supplier BidsYou company is contemplating bidding

Problem 4-4 Supplier Bids:You company is contemplating bidding on an RFP (Request for Proposal) for 100,000 units of a specialized part. Why might the amount be more than the requestingcompany actually wants?

Solution

The reason may be to reap the benefits of economies of scale.

Economies of scale arises when, with increase in output, unit costs associated with that level of output keeps decreasing. Therefore it is more advantageous to produce higher quantities, since unit cost and correspondingly the total cost of producing the output will come down.

In this case, if the company bids for 100,000 units, its unit (and total) cost of producing these units may likely be lower than if it bids to produce, say, 75,000 units. This will enable my company to quote a lower price. Besides, if the requesting company finds that my company can produce 100,000 units at a cost lower than what its competitors can, the requestor may be willing to buy the entire quantity bidded (100,000 units) to stock-in their inventory at a lower cost.