Page 3 - CIMA May 18 - MCS Day 2 Suggested Solutions

CIMA MAY 2018 – MANAGEMENT CASE STUDY

TASK 2 – TENDER PRICING

Suggested Solution:

To: Sebastian Cohard

From: Financial Manager

Date: Today

Subject: Tender pricing

Relevant costs

The use of relevant costs as a tool to help prepare a tender bid can allow us to charge low fees
whilst ensuring that the business doesn’t lose out in terms of cash flow.

Relevant costs are future, incremental cash flows and opportunity cash flows. This means that
only those cash flows that change as a result of taking on the route that is being tendered for are
taken into consideration when setting the fee.

Sunk / committed costs

For instance, before tendering we may have done some research into a particular route to
investigate the nature of the service that is required and on that basis have decided to go ahead
and tender. The temptation is to ensure that the tender fee covers these costs. But they have
already been spent or committed to and that won’t change whether the contract is won or not, so
they should be considered as sunk or committed costs and are not relevant for consideration in
the calculation of the costs of running the route.

Cash flows

Significant depreciation costs will be incurred on each of the vehicles used to run a new route, but
these costs should not be considered when calculating the cost of running the route. This is
because they are not cash values – they are numbers stemming from accounting concepts that
have no impact on Menta’s bank account.

Incremental items

Only those costs that are incremental to the new route should be considered. For instance, there
may be salaried drivers who currently have too much idle time, who will be transferred to the
new route and have their time fully utilised. While it may be tempting to apply a driver hourly
rate to the costs of the extra hours used in doing the new route, in reality the amount of cash
being paid to the driver will not have changed, so no cost should be recorded.

Opportunity costs

Items that should be included which are maybe not so obvious are opportunity costs. This would
be, for instance, the revenue lost from transferring an under‐utilised bus from a loss making route
to the route being tendered for. The operating costs of the bus will still be incurred, so there is no

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