(a) XY Ltd is to quote for contract No. 1701 to supply 10 000 units of a certain product to a large group with branches throughout the country.

It knows that the group will accept the lowest bid and.

from past experience and good intelligence within the industry, estimates the following probabilities of btds at vanous levels (in multiples of £5 only).

XY Ltd's out-of-pocket costs for these items are £32 peruntl.
Your are requ1red to calculate the price XY ltd should bid for this contract if it wishes to obtain the contract and maxtmtze its profit margm.

(b) In arriving at its out-of-pocket costs. XY ltd has estimated an amount per unit for servicing the items for one year as required by the terms of No. 1701 contract.
If it obtains the contract there are a number of ways in which it can satisfy this servicmg requirement:
( 1) To subcontract to AB Ltd which is willing to undertake the work in all areas or any individual area and has quoted:

(2) For South area only, to subcontract to CD Ltd which has quoted £18 000 plus a charge for seMce calls above a certatn level.
These charges and the assessed probability of their occurrence are:

(3) For Midland area only, it can use its own organization, but would need to take on extra staff.

The cost of this staff and the possibility of needing each level of extra staff are assessed as

If subcontractors are used, they will buy spares from XY Lid at an average price of £2 per unit to be serviced.
The out-of-pocket costs of these spares to XY Ltd IS £1.50 per umt.
You are required to calculate wh1ch combination of serv1cing arrangements will involve XY Ltd in the m1nimum cost. (Assume that the quality of all servicing is comparable and acceptable.)

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Price bid () 45 50 Probability of bids at that price 0.05 0.10 55 0.20 60 0.25 65 0.25 70 0.10 75 0.05 1.00