The Computron, Inc. is facing problems regarding pricing the bid for Computron 1000X, future functioning of Frankfurt plant, impact on production due to current market breakdown.
The main concern about Computron is that if the bid of 1000X should not higher than 20% of least bid to get the contract. It is strongly recommended to get the bid for functioning of new plant. Various issues regarding cutting down prices, bidding high or low and its pros-cons, current market situation and the competitors is discussed here.
Regarding the markup price, the top management is not allowing to go below 33.3%. Though some of the other options to be consider like on basis of past good relations with Konig explain them the benefits of high quality regardless the price, other options to be consider for future if bid is not gained etc. Such options are tested against the production, its cost, benefits to new projects.
Referring to current issue Computron is bidding $622,400 to sell its 1000x digital computer to Konig, which is 43% higher than least bid. A new manufacturing plant in Frankurt plant might have to sit idle for a couple of months if Computron couldn't win bid. Also Computron 1000X is purpose-built computer while Konig needs machine with less accuracy and flexibility.
Here are the some other issues:
1. Possible cut price to have a chance:
|Company |Price offered | |Computron |$622,400 | |Ruhr Maschinenfabrik |$ 436,000 | |EDAG |$ 545,600 | | |(assumption, since its price is only undersold Computron by the | | |amount of import duty) | |Digitex |$ 311,200 | | |(assumption. In the worst case, its price would be as half as | | |Computron's) |
In this case, the lowest offer is from Digitex and to win bid, Computron should at least offer a price around $ 373,440 (311,200 + 20% x 311,200) which is nearabout the factory cost ($ 384,000) and it’s not profitable.
2. Gain or loss by bidding low/high:
Bidding low leads to cash loss, less money to invest in R&D, harder to increase the price next time and may damage its premium image. And by bidding less make more chances to win the bid which is beneficial for future growth as Konig constituted over 80 %of Computron's sales in Germany and Germany consisted of over 24% of the total sales in Europe.
Through bidding high Computron can maintain the image of its company and prove that quality is the most important factor when it comes to auction. There's a potential profit with the new contract. However this strongly depends on the fact if Computron will actually get the contract or not.
3. Market situation:
The market is predicted to increase in 25% for the next several years. In the fiscal year 1995/1996, the sales in Europe were 11.40% of the worldwide sales. Of $1,300,000 worth of new business, $ 700 000 comes from Konig which means approximately 53.8% of the market.
The profit requirement of the company i.e. the 33.3% is not going to change by top management which leads Computron to put higher bid. Computron 1000X is much superior than the...