When deciding on the price to bid on a contract, the most straight forward approach is...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
When deciding on the price to bid on a contract, the most straight forward approach is to start with projected unit cost and add enough markup to make the desired profit. But what if that results in a bid that is too high, and the company loses the contract? It may be to the company's advantage to take a loss on the bid if the increased volume from the contract lowers unit cost on all other sales. This "indirect profit" can be calculated by: Indirect Profit = Lower Unit Cost Due to Contract x Non-Contract Unit Sales So for example, if increased production for the contract lowers average unit cost by $0.50, and non-contract sales are 200,000, the indirect profit from the contract is: Indirect Profit = $0.50 x 200,000 = $100,000 In other words, we can afford to lose up to $100,000 on the contract and still not lose money overall due the lower cost of goods. In the long run, we are actually better off because we have moved farther down the experience curve, and unit cost on future production will be lower. By using bid analysis, you can avoid the mistake of, on the one hand, biding too high and never benefiting from the potential reduction in cost of goods or, on the other hand, losing money by bidding too low. To complete the analysis, you will need to know the projected unit sales with and without the contract, along with the projected unit cost of goods with and without the contract. For this exercise, we will use the following projections: Item Estimated Value Unit Sales Without the Contract 250,000 Contract Units 50,000 Unit Cost Without the Contract $20.66 Unit Cost with the Contract $20.38 1. Let us say you think that a $20.00 bid will win the contract. Using the projections, what is the anticipated profit or loss on the contract? 2. What is the reduction in unit cost due to the contract? How much is the indirect profit? Student or Team Name: 3. Using your results from questions 1 & 2, what is the total impact of the $20 bid on profit? 4. Calculate the break-even bid on the contract using the following formula: Break-Even Bid = Unit Cost with Contract - Indirect Profit / Contract Units 5. The break-even bid calculation depends on the projections. What factors might affect those assumptions? When deciding on the price to bid on a contract, the most straight forward approach is to start with projected unit cost and add enough markup to make the desired profit. But what if that results in a bid that is too high, and the company loses the contract? It may be to the company's advantage to take a loss on the bid if the increased volume from the contract lowers unit cost on all other sales. This "indirect profit" can be calculated by: Indirect Profit = Lower Unit Cost Due to Contract x Non-Contract Unit Sales So for example, if increased production for the contract lowers average unit cost by $0.50, and non-contract sales are 200,000, the indirect profit from the contract is: Indirect Profit = $0.50 x 200,000 = $100,000 In other words, we can afford to lose up to $100,000 on the contract and still not lose money overall due the lower cost of goods. In the long run, we are actually better off because we have moved farther down the experience curve, and unit cost on future production will be lower. By using bid analysis, you can avoid the mistake of, on the one hand, biding too high and never benefiting from the potential reduction in cost of goods or, on the other hand, losing money by bidding too low. To complete the analysis, you will need to know the projected unit sales with and without the contract, along with the projected unit cost of goods with and without the contract. For this exercise, we will use the following projections: Item Estimated Value Unit Sales Without the Contract 250,000 Contract Units 50,000 Unit Cost Without the Contract $20.66 Unit Cost with the Contract $20.38 1. Let us say you think that a $20.00 bid will win the contract. Using the projections, what is the anticipated profit or loss on the contract? 2. What is the reduction in unit cost due to the contract? How much is the indirect profit? Student or Team Name: 3. Using your results from questions 1 & 2, what is the total impact of the $20 bid on profit? 4. Calculate the break-even bid on the contract using the following formula: Break-Even Bid = Unit Cost with Contract - Indirect Profit / Contract Units 5. The break-even bid calculation depends on the projections. What factors might affect those assumptions?
Expert Answer:
Answer rating: 100% (QA)
Item Estimated Value Unit Sales Without the Contract 250000 Contract Unit... View the full answer
Related Book For
Introduction to Corporate Finance
ISBN: 978-0324657937
2nd edition
Authors: Scott B. Smart, William L Megginson
Posted Date:
Students also viewed these mathematics questions
-
A firm wishes to bid on a contract that is expected to yield the following after-tax net cash flows at the end of each year: Year Net Cash Flow 1 ....... $ 5,000 2 ....... 8,000 3 ....... 9,000 4...
-
What factors should a manager consider when deciding on the amount and type of long- term debt to be used to finance a business?
-
What factors should a manager consider when deciding on the level of associate involvement in a decision? What shortcomings do you see in the VroomYetton model?
-
Boneyard Biscuits Dutch auction for an IPO was a great success. The firm offered 100 million shares. Bids appear below. a. What is the clearing price? b. What options do Boneyard and its underwriters...
-
Each year, the American Federation of Teachers (AFT) reports the state-by-state average salary for teachers in public schools. In a recent study, the AFT reported an average salary of $60,583 for...
-
The number of workmanship nonconformities observed in the final inspection of disk-drive assemblies has been tabulated as shown in Table 6E.14. Does the process appear to be in control? Number of...
-
How can supervisors validate the field work of interviewers?
-
Mike Samson is a college football coach making a base salary of $652,800 a year ($54,400 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a...
-
How might emerging technologies such as virtual reality therapy and biofeedback training be utilized to facilitate resilience-building by providing immersive, personalized experiences that promote...
-
Juliana Oliveria needs additional filing space at the end of the year in the companys office and chooses to use off-site, secured storage. Upon arriving at the storage facility, she discovers that...
-
Java program: (2): User's name. Write a program that prompts for and reads the user's first and last name (separately). Then print a string composed of the first letter of the user's first name,...
-
a. An escalator carries you from one level to the next in an airport terminal. The upper level is \(4.5 \mathrm{~m}\) above the lower level, and the length of the escalator is \(7.0 \mathrm{~m}\)....
-
A \(20 \mathrm{~g}\) ball of clay is thrown horizontally at \(30 \mathrm{~m} / \mathrm{s}\) toward a \(1.0 \mathrm{~kg}\) block sitting at rest on a frictionless surface. The clay hits and sticks to...
-
You and a friend each carry a \(15 \mathrm{~kg}\) suitcase up two flights of stairs, walking at a constant speed. Take each suitcase to be the system. Suppose you carry your suitcase up the stairs in...
-
You have an investment opportunity in Japan. It requires an investment of \($0.98\) million today and will produce a cash flow of 107 million in one year with no risk. Suppose the risk-free interest...
-
If we define the kinetic energy of the club head before the collision as "what you had to pay" and the kinetic energy of the ball immediately after as "what you get," what is the efficiency of this...
-
Jyothi Labs has the oppurtunity to invest Rs.200,000 now (t=0) and expects after tax cash flows of Rs.80,000 in t=1, Rs.85,000 in t=2 and Rs.90,000 in t=3. The project will last for three years only....
-
A liquid flows upward through a valve situated in a vertical pipe. Calculate the differential pressure (kPa) between points A and B. The mean velocity of the flow is 4.1 m/s. The specific gravity of...
-
In Table, why are the average real returns lower than the average nominal returns for each asset class? Is it always true that an assets nominal return is higher than its real return? Nominal (%)...
-
Why do investors need to pay attention to real returns, as well as nominal returns?
-
Will a deposit made into an account paying compound interest (assuming compounding occurs once per year) yield a higher future value after one period than an equal-sized deposit in an account paying...
-
Ive heard that economists build a lot of theories. Thats why I think that economics might be too abstract a course of study. Theories come with a lot of mathematics, diagrams, and complex terms. I...
-
What does it mean if you are included in another persons utility function in a positive way?
-
Can evidence prove that a theory is correct?
Study smarter with the SolutionInn App