Your company, Bright Paints, is one of several companies manufacturing a special reflecting paint used for traffic signs. Your two major customers are the state and the federal Departments of Transportation. The federal Department of Transportation has recently called for bids for 10,000 gallons of this special paint in a light blue, to be delivered within two months after signing the contract. You can foresee being able to fit in a production run of 10,000 gallons of the blue paint and have decided to bid on the job. This particular contract is absolutely stan¬ dard, similar in all respects to hundreds of contracts you have bid on in the past two years.

Your pricing policy has always been to apply a markup to incremental cost to arrive at the bid price. Your markup has varied with the competitive situation perceived prior to each bid. You have assembled data on all past bids, relating the markup rate used to the percentage of times your bid was the winning one, as shown below. Incremental cost for this contract has been estimated to be $76,200.

(a) Why would your company have previously bid at zero markup over incremental costs? Why didn’t it win all of those bids?

(b) What is the bid price that maximizes the expected contribution of the contract?

(c) Underlying your analysis is the assumption of ceteris paribus. Which things in particular must remain unchanged for your bid to be the optimal one?

(d) Why, or why not, is the fixed-price mode of bidding likely to be the best one to use for this contract?

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Markup Rate (%) Contracts Won (%) 0 10 95.9 84.8 15 65.4 20 41.3 25 15.7 30 3.0 35 0.2