A large department store has called for bids for the following contract: A truck plus its driver must be available, given one day’s notice, whenever the store’s own trucks are fully utilized, to deliver goods to suburban households. The expected number of days for which a truck will be required is 20, and the number of miles is expected to be 4,000, for the coming year.

You are the manager of the Clark Rent-A-Truck Company and have a number of trucks which you rent out on a day-to-day basis. One truck is a little older than the others and is always the last to be rented out because it does less for public relations than the newer trucks. In the absence of a contract with the department store, you expect this older truck to be rented out two-thirds of the 300 “rental days” this coming year. Your normal rental charge is $25.00 per day plus $0.35 per mile.

You estimate the costs of operating the older truck to be as follows, assuming 10,000 miles of rental over the coming year:

You can hire a driver on one day’s notice for $50 per day. A one-time cost of $400 will be involved in fitting the truck with a special loading ramp required by the contract. This ramp will not interfere with the normal use of the truck.

(a) On the basis of this information and by making whatever assumptions you feel are neces¬ sary and reasonable, calculate the incremental cost that would be involved in accepting this contract.

(b) What price would you bid, assuming that you wish to maximize profits and that you have no knowledge of who else will bid for this job nor of the “going rate” for this type of job?

(Outline the considerations involved and choose a bid price that would reflect your certainty equivalent for this gamble.)

Transcribed Image Text:

Depreciation Interest on investment in truck License fees and taxes Insurance Parking fees (permanently rented space) Gasoline Oil, grease, and preventive maintenance Repairs Allocated overheads $ 800 360 125 440 300 1,367 600 1,450 1,650