Teak Incorporation's Activity & Success

Introduction

Teak Incorporation is a small manufacturer of high pressure injection-molded plastic parts. It supplied mainly to the automotive industry. Due to a decline in its success in winning large contracts, it started pursuing greater numbers of small contracts. The issue is the company’s total business has dropped to an extent that its operating at only 70% capacity. Its sales manager realized there was something wrong with its bidding method which is the standard full cost accounting system. Moreover, as a result Teak Incorporated decided to change its bidding method. The replacement of the standard full cost accounting system with a new, completely automated computerized system of production is viewed by the management of Teak plastics limited as a means of maintaining the technological advancements in the industry as well as placing the firm at a competitive advantage for bidding operations. The computerized system results in total production capacity expansion, a substantial increase of the fixed costs and elimination of all labor with the exemption of maintenance and some handing. Consequently, the firm’s sales, operating expenses and profits are subject to variation there by necessitating a change in the company’s bidding method. For Teak to compete successfully, various elements should be considered in the determination of its appropriate pricing policy once the new system is installed.

Issues

Teaks success in winning large contracts has declined, as a result they now pursue a greater number of small contracts. The company’s business had dropped and are operating at the capacity of 70%. Teak’s manager Naomi Moir was trying to increase their sales, so they submitted more bids than they normally do which didn’t help the business. As they spent so much time in preparing the cost estimates of the bids. Taking too many contracts became time consuming for as much time was spent on preparing a cost estimate. In the previous years, they performed better because they didn’t take on many contracts. The rate of success in winning bids increased as the total size of the contract decreased. The standard full-cost accounting system for the bids wasn’t the best method for the company.

In previous years, Naomi used the standard full-cost accounting system for bidding in Teak Incorporation in the bidding process. Standard costing is the practise of substituting an expected cost for an actual cost in accounting records and then periodically recording variances showing the difference between the expected and actual costs. This bidding method deals with standard hours and standard hourly operating rates by regressing the costs associated with each machine department. The standard costs are usually associated with a manufacturing company’s costs of direct material, direct labour and manufacturing overhead. This means that their inventories and costs will reflect the standard costs or expected costs. In the case of Teak’s Incorporating bids were prepared with the goal of earning 20% markup on their total costs. Though there are certain advantages of using the standard-costing system like for companies that deal with custom products, they use standard costs to compile the projected costs of a customer’s requirements, after which it adds on a margin. Moreover, Teak’s success in winning large contracts has steadily declined, as a result, they started pursuing greater small contract in other for them to make profit. The method used for the bidding process was the Standard Full-Cost Accounting System The rate of success for winning bids was affected by this method because since they started taking on greater number of small contracts, it was time consuming to work on them.

Compared to the previous years, the success rate in winning bid increased when the total size of the contract decreased. If they want to be able to take on more contracts and increase sales, they will have to change their method of producing bids so that they do not have just two people from the accounting department preparing the bids. Teak can decide to continue using the standard full-cost method and refuse the number of contracts they take on or keep taking greater smaller contracts but change their bidding method to use a computerised system since it will take more time to prepare cost data for the bids.

The new bidding method Naomi decided to adopt for Teak Incorporation involves using contribution, probabilities and expected values. In probability theory, an event is the term used for something, which may or may not occur. A decision problem might incorporate many events and the difficulty lies in determining the probability factor for each one of them. The probability theory is based on the concept of complementary events. For example, when a company submits a bid for a certain project, the probability that the company might win the contract (event A) or might not win this contract (event A′). Therefore, it is always true that: Probability of (A) + Probability of (A′) = 1. However, in relation to Teak Incorporation, we can see that highest probability of winning contract is 95% but has the lowest bid amount of $136000 and the lowest is 65% with the highest bid amount of $156000. The probability of winning a bid is a useful information for many companies as it helps them decide on the bidding process and which bids to consider since the outcomes in terms of timelines and costs are hard to predict. Knowing the probability of winning a bid helps evaluate how risky a particular bid price might be in terms of making a profit or loss.

Conclusion

To conclude, its beneficial for a company to know the probability of winning a bid contract as it provides an understanding of the risks and uncertainties involved. It defines the range, as well as the probability of a particular outcome. Understanding a project’s uncertainties and proactively managing the potential risks gives a more accurate picture of what is feasible within a specified time-frame. It adds honesty and confidence to the bid and delivery process for both client and contractor.