Your cookie company is growing but not as rapidly as you would like. You are exp

Question

Your cookie company is growing but not as rapidly as you would like. You are exploring producing products for businesses. During a recent conversation with the owner of a local car dealership, he offered to buy 500 cookies for a special event in the community. He asked that the cookies be displayed in the shape of a car and he would like the dealership's logo on each cookie. He has agreed that the cookies can be your signature flavor.

The display will cost $200 to build and the logo for each cookie will cost $.03. This is a rush order and may require some overtime. You are required to deliver the cookies to the event and provide a napkin for each cookie.

The business owner would like a deal since he is purchasing so many cookies and you are "getting your name out there". This could potentially lead to more business.

Prepare calculations to determine what price you will charge the business owner for the entire project. After presenting the bid to the business owner, he offered to pay 85% of what you would like to charge. Can you do it for the reduced price and still make a profit? Prepare a new cost analysis assuming the new price.

Prepare detailed analysis for each part of the assignment, outlining all of your costs and revenues. Clearly explain whether you will take the job at the reduced price or pass on it. Explain

Save your assignment as an Excel spreadsheet.

Explanation / Answer

A special order is a unique, one-time order made by a customer that requires a variation in the manufacture of your regular products. So we should analyze the proposal and justify whether to accept or reject the special order. This will be based on sales revenue, costs of production and the long-run implications of reducing prices to accommodate special orders. For the production line, you have to either leverage idle capacity or drop a process segment if you face resource constraints but have to meet the special request. In case its operating at full capacity, need to forgo existing capacity to accommodate the special order, where we need to consider opportunity cost to calculate net profit of the total deal.

In this particular scenario, it appears to be operating at full capacity. for any new production, need to incur extra labour cost for overtime. So to accommodate this 500 cookies, need to give up 500 cookies from existing production.

Please refer to my working file, the minimum price need to be quoted is $4.95, being cost per unit comes to $4.94. for each unit of cookie, profit will be 1 cent.

So at the current scenario with 85% of price offered will lower the net profit, hence the proposal is not acceptable.

@full capacity @full capacity Existing Special Order if 85% of price offered New after giving up Special Order selling Qty/Nos 10,000 500 500 9,500 500 Selling Price $5.00 $4.20 $5.00 $4.20 Cookie Material $2.00 $2.00 $2.00 $2.00 $2.00 Labour @50c/hour $1.00 $1.50 $1.50 $1.00 $1.00 Other Variable $1.00 $1.00 $1.00 $1.00 $1.00 Logo charge $0.00 $0.03 $0.03 $0.00 $0.03 Napkin cost $0.00 $0.01 $0.01 $0.00 $0.01 Fixed cost $5,000.00 $200.00 $200.00 $4.20 $5,000.00 $200.00 Min Rate Minimum Cost $2,470.00 $4.94 Minimum Cost $2,220.00 Sales $50,000.00 $2,470.00 $2,099.50 $47,500.00 $2,099.50 Variable cost Cookie Material $20,000.00 $1,000.00 $1,000.00 $19,000.00 $1,000.00 Labour $10,000.00 $750.00 $750.00 $9,500.00 $500.00 Other Variable $10,000.00 $500.00 $500.00 $9,500.00 $500.00 Logo charge $0.00 $15.00 $15.00 $0.00 $15.00 Napkin cost $0.00 $5.00 $5.00 $0.00 $5.00 $40,000.00 $2,270.00 $2,270.00 $38,000.00 $2,020.00 Contribution $10,000.00 $200.00 -$170.50 $9,500.00 $79.50 Profit $5,000.00 $0.00 -$370.50 $4,500.00 -$120.50 Opportunity Cost $500.00 -$620.50 Total Profit $3,879.50

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