Business EconomicsYou 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.
At full capacity
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%
Incremental costs exceed yours by about 10%
Similar cost structure to yours
Incremental costs 20% lower but full costs are similar to yours
Does not like winter jobs or dirty jobs
Does not like messy or inconvenient jobs
Likes projects where it can show its creativity
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.
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.
Must show all calculations (Spreadsheet)