A company is trying to decide whether to bid for a certain contract or not. They estimate that merely preparing the bid will cost $10,000. If their company bid then they estimate that there is a 50% chance that their bid will be put on the "short-list", otherwise their bid will be rejected. Once "short-listed" the company will have to supply further detailed information (entailing costs estimated at $5,000). After this stage their bid will either be accepted or rejected. The company estimate that the labor and material costs associated with the contract are $127,000. The company will incur this cost only if it's bid is accepted. They are considering two possible bid prices, namely $160,000 and $170,000. They estimate that the probability of being accepted with those bids are 0.6 and 0.4, respectively for the bid of $160,000 and $170,000.

1) What is the company's monetary payoff if it prepares the bid, get short-listed, and offers a bid of $160,000 and is accepted?

2) What is the company's expected monetary payoff if it prepares the bid, get short-listed, and offers a bid of $160,000?

3) Create a decision tree and solve.

Answer rating: 100% (QA)

1Payoff Probability of being accepted x Contract cost Cost of preparing bid Cost of further detailed ... View the full answer