Jaime Cake was a nationwide bakery chain store in PRC, which had more than 1000 licensed shops in 50 first-tier cities around the country. Sales of one product, a fruit cake, alone were more than 30 million pieces a year. Jaime owned a small production shop, producing a small quantity of frozen dough for cakes and pastries (the major part of a fruit cake). The bulk of supply came from production contractors who bid for a tender every year. Usually, those production contractors could manage a very thin profit from the contracts. This year, four suppliers were invited to bid, one of which was new. Three invitees had supplied Jaime Cake before and one of them refused to bid the tender again.

MongKee, located in Guangzhou in the south of China, was a famous contractor in China for insourcing production. It was its third year in business with Jaime Cake. Under its current capacity, MongKee could undertake production of 20 million pieces of dough. Best Foods was located in Wuhan, Central China. It was an associate company of Jaime Cake and could always win the tender even at a slightly higher price. Best Foods was a medium-sized factory with spare production capacity of eight million pieces to cater for Jaime Cake's contract. Chevalier, a new invitee and a neighbor of Best Foods, was a large factory with a capacity equivalent to 30 million pieces of dough. Chevalier had its own branded products. Due to a slow business in the recent year, Chevalier wanted to explore this insourcing business line to absorb the excess capacity. They knew the profit was far lower than the branded products.

The tender required the invitees to produce frozen dough for cake pastry. Major material prices (such as flour, margarine) were fixed, thanks to Jaime's strong negotiating power. The core part of the production processes was handmade. A single price (ex-factory price) was applied to all regions. Freight charges for each region were separately quoted.

Forecast demand quantity for each region is given in Table 12.15.

An estimate of freight charges for each region is provided in Table 12.16 Regional freight charge estimates

MongKee summed up the information pertinent to the tender: the price for the existing contract was RMB 60 per carton. Variable cost was 70% (material costs were 60% and labor cost and other overheads were 40%) and fixed cost was 25% of the total contract value (RMB 4.8 million this year). Fifty percent of the fixed cost was fixed and the remaining subject to inflation. It was its first year of making profits after 2 consecutive years of loss. Best Foods' price was 6% higher than MongKee's and Jaime Cake's own production could never be as cost efficient as the contractors.

Forecast demand quantity

In cartons (100 pieces per carton) Region South Region Central Region North

Forecast sale volume 90000 130000 90000

Regional freight charge estimates

Average Freight charges per carton (in RMB) From Region South From Region Central

To Region South 0.5 3.9

To Region Central 3 0.7

To Region North 4.3 3.5

MongKee secured the Region South order this year. It wanted to get a larger share within its current capacity in order to make up the loss in the past years. MongKee anticipated a general price rise of 8% next year.

Question: How should MongKee price the tender?