Role of Excess Capacity in Competitive Bidding

question 12

Essay

Role of excess capacity in competitive bidding
Yendys Pty Ltd is preparing a bid for a project. Yendys experiences considerable seasonal variation in the level of activity. This particular project would be done during a slack period of the year. The cost structure of the company reflects high fixed costs.
i. How should the fixed costs be handled in the 'time and materials' bidding approach to this project?
ii. Assume the company wins the bid and performs the job with financial results as projected in the bid. Several months later, the customer contacts Yendys directly and requests a bid to do another job. However, this project must be done during a peak season. How should Yendys' management respond? How do you think the customer will respond?

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Definitions:

Accounts Payable

The amount a company owes to suppliers or creditors for goods and services purchased on credit, represented as a liability on the balance sheet.

Depreciation

The systematic allocation of the cost of a tangible asset over its useful life.

Inventory Change

The difference in inventory levels between two time periods, reflecting purchases, sales, and usage.

Accrued Liabilities

Obligations that a company has incurred but not yet paid for, recognized in accounting to match expenses with the revenues they help to generate.