Installation Bids. Your company has been asked to bid on the installation of the hardware for wireless
Question:
Installation Bids. Your company has been asked to bid on the installation of the hardware for wireless network for 23government buildings for Oklahoma City. Each building will cost $21,000 in installation costs, and, in addition, there will be a fixed expense of $8,000 to cover the preparation and submittal of the bid. You are considering five different bid levels. Each level involves a different profit margin, calculated as a percentage above total installation cost (TIC). The expense of the bid is excluded from this calculation, but it is relevant for profitability that it will win the bid at each level being considered. The bids and the probabilities are summarized in the following table.
Amount of Bid | Probability of Winning | |
Bid 1 | TIC + 5% | 0.630 |
Bid 2 | TIC + 10% | 0.573 |
Bid 3 | TIC + 15% | 0.515 |
Bid 4 | TIC + 20% | 0.458 |
Bid 5 | TIC + 25% | 0.400 |
a. What is the optimal bid for your company to make?
b. What is the expected profit associated with the optimal bid?
Managerial Accounting Tools for Business Decision Making
ISBN: 978-1118856994
4th Canadian edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly