Your company is considering whether it should tender for two contracts (C1 and C2) on offer from a government department for the supply of certain components. If tenders are submitted, the company will have to provide extra facilities, the cost of which will have to be entirely recouped from the contract revenue. The risk, of course, is that if the tenders are unsuccessful then the company will have to write off the cost of these facilities.

The extra facilities necessary to meet the requirements of contract C1 would cost 50,000. These facilities would, however, provide sufficient capacity for the requirements of contract C2 to be met also. In addition the production costs would be 18,000. The corresponding production costs for contract C2 would be 15,000.

If a tender is made for contract C2 only, then the necessary extra facilities can be provided at a cost of only 24,000. The production costs in this case would be 12,000.

It is estimated that the tender preparation costs would be 2,000 if tenders are made for contracts C1 or C2 only and 3,000 if a tender is made for both contracts C1 and C2.

For each contract, possible tender prices have been determined. In addition, subjective assessments have been made of the probability of getting the contract with a particular tender price as shown below. Note here that the company can only submit one tender and cannot, for example, submit two tenders (at different prices) for the same contract.

Possible Probability

tender of getting

prices () contract

Tendering for C1 only 120,000 0.30

110,000 0.85

Tendering for C2 only 70,000 0.10

65,000 0.60

60,000 0.90

Tendering for both C1 and C2 190,000 0.05

140,000 0.65

100,000 0.95

In the event that the company tenders for both C1 and C2 it will either win both contracts (at the price shown above) or no contract at all.

What do you suggest the company should do and why?

What is the "downside" of your suggested course of action?