Operation Management Chapter 7

SYST 371: Systems Engineering Management

Homework 4 Solutions

Problem 1 (30 points)

Your firm designs PowerPoint slides for computer training classes, and you have just

received a request to bid on a contract to produce the slides for an 8-session class. From

previous experience, you know that your firm follows an 85 percent learning rate. For

this contract it appears the effort will be substantial, running 50 hours for the first session.

Your firm bills at the rate of $100/hour and the overhead is expected to run a fixed $600

per session. The customer will pay you a flat fixed rate per session. If your nominal profit

margin is 20 percent, what will be the total bid price, the per session price, and at what

session will you break even?

You should submit your spreadsheet along with the your answer to the question

Based on the questions I received during the week, most people were able to calculate the

hours but didn’t know how to transform it into cost per session and then calculate the

cumulative cost. A few who were successful in calculating the cumulative cost didn’t

know what would take to get a bid price. That is, the problem was not really the math

involved, but understanding the scenario as explained above and what the numbers mean.

Thus, I have listed a step-by-step tutorial on the scenario, which is in fact based on the

various replies I wrote during the week and weekend. Again, the idea of the steps below

is to provide you with an understanding of the overall meaning of the situation.

1) You have a cost per session. -> Your client doesn't know it.

2) You need to bid for the job, others will be bidding too.

3) You cannot bid for less than what you believe your costs will be, but you cannot bid

too high either or someone else will win the bid.

4) Before you come up with a bidding price, you need to know your actual costs.

5) You start by calculating how long each session takes, so you can calculate its variable

cost (i.e. cost per...