ABC Corporation is considering whether it should offer two contracts (S1 and S2) from a private department for the supply of Engineering materials. The company has three options: offer for S1 only; or offer for S2 only; or offer for both S1 and S2. If offers are to be submitted, the company will incur additional costs. These costs will have to be entirely recouped from the contract price. The risk, of course, is that if an offer is unsuccessful the company will have made a loss. The cost of offering contract S1 only is $50,000. The material supply cost if the offer is successful would be $18,000. The cost of offering contract S2 only is $14,000. The material supply cost if the offer is successful would be $12,000. The cost of offer for both contract S1 and contract S2 is $55,000. The material supply cost if the offer is successful would be $24,000. For each contract, possible offer prices have been determined. In addition, subjective assessments have been made of the probability of getting the contract with a particular offer price as shown below. Note here that the company can only submit one offer and cannot, for example, submit two offers (at different prices) for the same contract. Option Possible offer prices (euro) S1 only 130,000 115,000 0.20 0.85 S2 only 70,000 65,000 0.15 0.80 S1 and S2 60,000 190,000 140,000 0.95 0.05 0.65 In the event that the company offers both S1 and S2 it will either win both contracts (at the price shown above) or no contract at all. What do you suggest the company should do and why? What is the decision? Draw the decision tree on your solution set submission and show the monetary values for each node/stage.
ABC Corporation is considering whether it should offer two contracts (S1 and S2) from a private department for the supply of Engineering materials. The company has three options:
- offer for S1 only; or
- offer for S2 only; or
- offer for both S1 and S2.
If offers are to be submitted, the company will incur additional costs. These costs will have to be entirely recouped from the contract price. The risk, of course, is that if an offer is unsuccessful the company will have made a loss.
The cost of offering contract S1 only is $50,000. The material supply cost if the offer is successful would be $18,000.
The cost of offering contract S2 only is $14,000. The material supply cost if the offer is successful would be $12,000.
The cost of offer for both contract S1 and contract S2 is $55,000. The material supply cost if the offer is successful would be $24,000.
For each contract, possible offer prices have been determined. In addition, subjective assessments have been made of the probability of getting the contract with a particular offer price as shown below. Note here that the company can only submit one offer and cannot, for example, submit two offers (at different prices) for the same contract.
| Option |
Possible offer prices (euro) |
|
| S1 only |
130,000 115,000 |
0.20 0.85 |
| S2 only |
70,000 65,000 |
0.15 0.80 |
| S1 and S2 |
60,000 190,000 140,000 |
0.95 0.05 0.65 |
In the event that the company offers both S1 and S2 it will either win both contracts (at the price shown above) or no contract at all.
- What do you suggest the company should do and why? What is the decision? Draw the decision tree on your solution set submission and show the monetary values for each node/stage.
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