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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 |$622,400 |
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|EDAG |$ 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 requirement of Konig in terms of accuracy, flexibility, quality that makes it more costlier. If bid is not achieved, it’s not possible for new plant in Germany to generate the high volume product and sale with economies.
Statement of Options
1. Cut down the 33.3% markup cost upto certain level and From past customer relationships use knowledge and contacts to persuade Konig about the importance of high quality to achieve bid.
2. Make some minor changes in the production line to minimize flexibility-accuracy and accordingly reduce the cost.
3. Put bid without changes and look for other future options.
Criteria for Evaluation
1. Make new plant at Frankfurt working successfully.
2. Better output which helps to gain profit margins.
3. Improved relationship with customers.
Evaluation of Options
Option 1 refers to cut down the markup price of the computer and get top management informed about its future benefits and scopes. Taking advantage of past good relationships, Computron can make Konig understand the importance of high quality product and reliability to get the bid and make the future plant compete. Here the output is in terms of quality and hence customer satisfaction is higher.
Option 2 suggests to compromise with the quality of the product. Because of less flexibility-accuracy requirement of Konig, Computron can justify its machine by lowering the specifications so that its production cost reduces and likewise reduce its cost price to win the bid. Here output is in terms of quantity, require less skill employee at plant and new contacts make good customer values.
Option 3 headed towards the future goals if bid is lost in case. German market to increase 25% ($1,300,000 worth of new business) for the next several years. Other than Germany, England (22% sales), Sweden(18%), other European country(36%) are also the best for the growth of Computron. This will be helpful to make the foundation firm of new plant and 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.
I suggest that Computron should go with the price cutting strategy and offer the bid as $ 400,000 (Option 1). As shown in exhibit 1, Computron is having highest cash equivalents, working capital than previous years. So, top management can be explained that Computron is capable to face the loss in the beginning. But finally by bidding low and gaining the contract it would make it possible and less risk to build new factory. Also it would help them pay for much of their overheads($600,000) for the factory. If possible to discuss with Konig Purchasing Vice President, we should discuss with him to understand more on the criteria and priority in making decision with regards to the special digital computer (cost, quality or support etc)'s bidding. Also enlighten future breakdown of new business that’ll help both Konig & other European market. (Exhibit 2)
This way it could maintain to keep the profit and establish good relationship with Konig which can be the foundation for the contract that's worth $ 700,000 in the next several years. Computron can adjust the price for European market later when the plant is ready.
1. Reduce the allowance for R&D for this year, it can be further funded later on.
2. Employ less skilled workers as it is required to produce less accurate-flexible product and reduce administration expenses.
3. Market 1000X in other European countries to bring-in more orders.
4. Make allowance for recycle the product after its useful life. This way it helps to reduce the purchase of additional parts.
The implementation of above proposals may be done without any exigencies though following are the some of the issues needed to look after:
1. The staff and the production techniques should be improved later on. Training centers, latest tools, tech-awareness programs can be implemented for this.
2. In addition to 1000X, Computron can also increase its small line of accessory process control computer equipment to relatively pour some liquidity to its income-statement.
Financial statement of Computron, Inc.
As of December 31,
1992 1993 1994 1995
-------- -------- -------- -------
BALANCE SHEET DATA (1):
Cash, cash equivalents, short-term
investments and restricted cash $ 7,235 $ 4,554 $ 16,302 $46,651
Working capital 434 1,619 7,688 40,450
Total assets 15,585 16,119 35,075 71,367
Total debt and capital lease obligations 3,345 5,183 6,496 820
Redeemable convertible preferred stock 11,144 14,611 40,038 --
Total stockholders' equity (deficit) (3,592) (10,907) (28,782) 46,398