I need help to solve the Case: Concord Plastics Moulding (CPM) Thanks

Case: Concord Plastics Moulding (CPM) The sales manager of Concord Plastics Moulding (CPM), Chris Tam, was concerned about the bidding results of the last two years. CPM is a small manufacturer of high pressure injection-molded plastic parts, supplied to the automotive industry. They are qualified as a Tier 2 supplier and their customers are Tier 1 companies such as Lear, Magna, Johnson Controls and Faurecia. Tier 1 companies supply directly to car assembly plants on a just in time basis. Over the past few years, CPM's success in winning large contracts had steadily declined, forcing CPM to pursue greater numbers of small contracts and moving up the supply chain and becoming a Tier 3 supplier. This has become a serious problem; the company's total business has dropped to such an extent that it is currently operating at only 70% of capacity. Chris realized that there was something wrong with their method of preparing bids. In the past two years, Chris found that the rate of success in winning bids increased as the total size of the contract decreased; particularly he observed that they were really successful in the Tier 3 segment. In their attempt to increase the total amount of sales for CPM, they had submitted almost double the number of bids compared to previous years, but the number of bids submitted for Tier 2 contracts remained the same although the success rate declined sharply. This resulted in two people from the accounting department spending most of their time preparing the cost data for the bids. CPM used a standard full-cost accounting system, and bids were prepared with the objective of earning a 20% markup on total costs. Standard hourly operating rates were developed using regression analysis of monthly prior-period costs for each machine and process. These costs, labeled as conversion costs, included all labour, job setup, and mold development costs as well as fixed and variable processing overhead costs. The job setup and mold development costs were fairly constant from job to job. The coefficients from the regression analysis were used as the rates for variable-cost items and the intercept values were divided by full capacity processing hours to determine the rates for fixedcost items. Chris has the idea that there is something wrong with CPM's current bidding system. Accordingly, he decided to test alternative approaches in preparing their next bid for a fairly small contract for instrument panel components requested by Johnson Controls Inc. He started with the usual bidding method based on the cost estimate prepared by the accounting department (Exhibit 2-1), and made a mental note that he would normally have submitted a bid of $145,000. He then made his best estimates of the probabilities of winning the contract at various bids (Exhibit 2-2) based on the past experience of the last two years and the profile of the customer. EXHIBIT 2-1 Cost Estimates for Contract to Supply 10,000 Automobile Instrument Panel Components to Johnson Controls Inc Standard Hours Standard Rate/Hour Cost per Unit $4.463 300 300 $21.97 26.17 Processing on machine: Variable Fixed 500 500 $51.50 34.50 Finishing: Variable Fixed 100 100 23.50 26.50 $0.659 $0.785 $1.444 $2.575 $1.725. $4.300 $0.235 $0.265 $0.500 $10.707 1.075 $11.782 0.337 $12.119 2.432 $14.551 $145,510 Material Conversion costs: Labour: Variable Fixed Total manufacturing costs before rejects Rejects (1) Total manufacturing costs Selling and administration (2) Total cost Markup (20%) Standard price per unit Standard bid for 10,000 units (3) Notes: 1) A 10% standard allowance was added for defective units which would be rejected during final inspection. This reflected a normal spoilage rate. 2) Selling and administration costs were all treated as fixed. 3) This contract would utilize 2% of CPM's total capacity. EXHIBIT 2-2 Probability Estimates Regarding the Potential Contract to Supply 10,000 Automobile Instrument Panel Components to Johnson Controls Inc. Probability of Bid Amount Winning Contract $135,000 95% 145,000 90 150,000 80 155,000 70 160,000 65 As of today, Chris wants to carefully evaluate CPM's method of preparing bids and find an explanation of how the rate of success in winning bids was affected by this bidding method. However, he also is facing an immediate challenge that has to be solved: considering only quantitative factors, what amount should CPM bid for the instrument panel component contract? What qualitative factors should be considered before deciding on the amount of the bid? When thinking in the long term, there are other issues that should be considered. A couple of months ago top management has decided to replace the existing production system with a new, completely automated computerized production system. This is aimed at keeping up with technological advances in the industry and hoping to improve the company's success in winning large contracts in the Tier 2 segment. This new system will expand the total production capacity of CPM and eliminate all labour except maintenance and some handling. Fixed costs, however, will be significantly increased. What would be the implications in the bidding process of CPM once the new computerized production system is installed and what actions need to be taken before moving to the new system? Required: As CPM's assistant controller, use the case approach and prepare a report to Chris Tam which addresses and resolves his concerns