Assignment:
Marketers Inc., developed a promotional program for a large shopping center in Sunset Living, Arizona, A few years ago. Having invested $360,000 in developing the original promotion campaign, the firm is ready to present its client with an add-on contract offer that includes the original promotion areas of (1) a TV advertising campaign, (2) a series of brochures for mass mailing, and (3) a special rotating BIG SALE schedule for 10 of the 28 tenants in the shopping center. Presented below are the revenue terms from the original contract with the shopping center and the offer for the add-on contract, which extends the original contract terms.
TV advertising campaign Original Contract Terms $520,000 Extended Contract Including Add-On Terms $580,000
Brochure series Original Contract Terms 210,000 Extended Contract Including Add-On Terms 230,000
Rotating BIG SALE schedule Original Contract Terms 170,000 Extended Contract Including Add-On Terms 190,000
Totals Original Contract Terms $900,000 Extended Contract Including Add-On Terms $1,000,000
Marketers, Inc., estimates that the following additional costs will be incurred by extending the contract:
Direct Labor TV Campaign $30,000 Brochures $9,000 BIG SALE Schedule $7,000
Variable overhead costs TV Campaign 22,000 Brochures 14,000 BIG SALE Schedule 6,000
Fixed overhead costs* TV Campaign 12,000 Brochures 4,000 BIG SALE Schedule 2,000
80 percent are direct fixed costs applied to this contract.
1. Compute the costs that will be incurred for each part of the add-on portion of the contract.
2. Should Marketers, Inc., offer the add-on contract, or should it ask for a final settlement check based on the original contract only? Defend your answer.
3. If management of the shopping center indicates that the terms of the add-on contract are negotiable, how should Marketers, Inf., respond?