The sales manager of teak plastics limited (teak) , Naomi Moir , was concerned about the company record in winning bids. teak was a small manufacturer of high pressure injection- molded plastic parts, supplied mainly to the 

automotive industry . over the past few years , teak success in winning large contracts had steadily declined , forcing teak to pursue greater number of small contracts . this has become a a serious problem : the company total 

business has dropped to such an extent that it is currently operating at only 70% of capacity . NAOMI realized that there was something wrong with her method of preparing bids in the past year , NAOMI found that the rate of 

success in winning bids increased as the total size of the contract decreased. in her attempt to increase the total amount of sales for teak during the past year, she had submitted almost double the number of bids compared to 

previous years. this resulted in two people from the accounting department spending most of their time preparing the cost data for naomi bids . teak used a standard full cost accounting system and bids were prepared with the 

objective of earning a 20 % markup on total costs. standard hourly operating rates were developed using regression analysis of monthly prior- period costs for each machine and process. these costs included all labour, job setup , and mold development costs as well as fixed and variable processing overhead costs . the job setup and mold development costs were fairly constant from job to job . the coefficients from the regression analysis were used as the rate for variable cost items and the intercept values were divided by full capacity processing hours to determine the rates for fixed cost items. at a recent business luncheon seminar ,Naomi had been impressed by the speaker 

model for preparing bids this model involved using contributions, probabilities , and expected values. accordingly ,she decided to test the approach in preparing her next bid for a fairly small contract for instrument panel 

components.. she started with her usual bidding method based on the cost estimate prepared by the accounting department (exhibit 2-1) and made a mental note that she would normally have submitted a bid of $ 141000 she 

then made her best estimates of the probabilities of winning the contract at various bids( exhibit 2-2)

 

exhibit 2-1 teak

cost estimates for contract to supply 100000 automobile instrument panel components

standard hour standard rate/hour cost per unit

processing on machine 5:

variable 500 $51.50 $2.575

fixed 500 35.50 1.775

total machine processing costs =4.350

material 4.463

finishing :

variable 100 23.50 .235

fixed 100 28.50 .285

total manufacturing costs before rejects 9.333

rejects .933

total manufacturing costs =10.266

selling and administration .337

total cost before royalty =10.603

markup 20% 2.121

=12.724

royalty of 10% of sales 1.414

standard price per unit 14.138

standard bid for 10000 units 141380

exhibit 2-2 TEAK

probability estimates regarding the potential contract to supply 10000 automobile instrument panel components

bid amount probability of winning contract

$136000 95%

141000 85

146000 80

151000 75

156000 65

REQUIRED :

1- considering only quantitative factors, what amount should naomi bid for the instrument panel component contract? what qualitative factors should be considered before deciding on the amount of the bid ?

2-evaluate NAOMI past method of preparing bids and explain how the rate of success in winning bids was affected by this bidding method . discuss the appropriateness of using probabilities and contributions for preparing bids 

in teak current situation 

 

3- in order to keep up with technological advances in the industry and in the hope of improving the company success in winning large contracts, top management has decided to replace the existing production system with a new , completely automated computerized production system . this new system will expand the total production capacity of TEAK and eliminate all labour except maintenance and some handling fixed cost, however will be significantly 

increased. discuss the considerations in determining an appropriate pricing policy (bidding method) for TEAK once the new computerized production system is installed . 

 

Answer rating: 100% (QA)

1 Quantitative Factors for Bidding To determine the bid amount for the instrument panel component contract Naomi should consider the expected value approach which incorporates both the probabilities o... View the full answer