A contractor submits a bid on a project, for which more research and development

Question

A contractor submits a bid on a project, for which more research and development work needs to be done. It is estimated that the total cost of satisfying the project specifications will be $20 million, plus the cost of the further research and development work. The contractor views the cost of this work as a random variable with mean $4 million and standard deviation $1 million. The contractor wishes to submit a bid such that his expected profit will be 10% of his expected costs.

a) What should be the bid?

b) If this bid is accepted, what will be the standard deviation of the profit made on the project?

Explanation / Answer

A)
20 mil + ( 4mil - 1 mil) = 23 mil
23 mil / 10 = 2.3 mil
23mil + 2.3 mil = 25.3 mil
The contractor should bid $25.3 mil

B)
Profit will vary from $5.3 mil to $7.3 mil

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