Question
The following information pertains to questions 24 and 25. PTM Ltd. is a Canadian manufacturer of hardware parts. A large company is open for tenders
The following information pertains to questions 24 and 25.
PTM Ltd. is a Canadian manufacturer of hardware parts. A large company is open for tenders
on a three-year contract for 150,000 units of part X per year. PTM Ltd. currently supplies this
model to another company for $6.50 per unit. The probabilities of PTM Ltd. being awarded the
contract at various bid prices are estimated as follows:
Probability Bid Price Per Unit
100% $5.00
90% $5.50
65% $6.00
40% $6.50
10% $7.00
PTM Ltd.s standard cost for producing Part X is $4.80 per unit ($3.60 variable + $1.20 fixed) at
a standard activity of 375,000 units per year. The companys production capacity is 600,000
units per year. If PTM Ltd. is awarded the contract, fixed overhead costs will increase by
$12,000 per year.
24. Which bid price for the three-year contract would have the most favourable expected
impact on PTM Ltd.s income?
a) $5.00
b) $5.50
c) $6.00
d) $6.50
e) $7.00
25. The chances of PTM Ltd. being awarded the contract would change if Company X, a
major competitor, decides to not submit a bid for the contract. Assume the following
incremental income if PTM Ltd. is successful in obtaining the contract at various bid
prices, and assume the following probabilities of success if Company X bids or does not
bid on the contract:
Probability of PTM Ltd.s Success
Bid Price Incremental Income If If Company X If Company X
Per Unit Successful Bids Does Not Bid
$5.00 $200,000 100% 100%
$5.50 $275,000 90% 100%
$6.00 $350,000 65% 100%
$6.50 $425,000 40% 85%
$7.00 $500,000 10% 25%
There is a 65% chance that Company X will submit a bid. Using a decision table model,
what is PTM Ltd.s expected value of submitting a bid of $6.50 for the contract?
a) $144,500
b) $425,000
c) $361,250
d) $170,000
e) $236,938
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