Scott Hebert

It has come to the attention of Company X that a competitor has submitted a bid for an upcoming project that is lower than Company X’s initial bid. Fortunately, Company X has not yet submitted their bid and have an opportunity to act on this new information. The original plan was to submit a bid for 150 clocks at $650 per clock. This would result in a sale of $97,500 over the next year. Since the competitor’s bid is $600, Company X must price the clocks at $599 each in order to secure the contract.

If Claire’s Antiques had won the bid at $650 per clock, the resulting profit after variable and fixed costs had been subtracted (ignoring sales commissions) would be $105,100 for the year. Reducing the bid to $599 results in an annual profit of $97,450. This 8% percent reduction in profit can be contrasted to the $55,600 profit earned by Claire’s Antiques. Losing the contract altogether results in a 48% reduction in profits for the year. It is clear that Claire’s Antiques must submit the competitive bid and, if necessary, make up for the profit reduction somewhere else.

If Claire’s Antiques must make up the $7,650 of profit lost by decreasing the bid price of the clocks, the best option is to increase the prices of their other items. The easiest method to do this might be to increase the sales price of clocks sold outside the contract. By dividing the amount of necessary profit by the number of clocks sold outside the contract, we find that the price of clocks must be raised $12.34 in order to absorb the profit lost in the reduced contract price. Because of the lower price of clocks, it’s sales price is more significantly impacted by the increases in price. Claire’s Antiques can choose to raise one items price, or spread the increases across several items.

Tags: accounting, business