Reference no: EM133156195

HydrauSpec has the opportunity to bid on a government contract for 100,000 high-pressure valves to be used in the hydraulic systems for aircraft. HydrauSpec estimates that these valves could be manufactured by their existing equipment at a cost of $12 per unit. However, one of their engineers has suggested a new process for manufacturing the valves. The unit cost for the new process will be $8 if all goes well. If complications arise however, the cost would be prohibitive, so they would have to return to the old process. The engineers estimate the probability of no complications at 0.6 and the probability of complications at 0.4. The investment required for the new process is $100,000, which would not be recoverable.

The company must make its bid on the contract before the new process can be developed and tested. Bids of $16 and $14 per valve are under consideration and the estimated probabilities of obtaining the contract with each bid are 0.5 and 0.7, respectively. If HydrauSpec's bid is rejected, there is no possibility of submitting a second bid.

Construct a model to help HydrauSpec determine an optimal bidding and production strategy.