Case Scenario:
Stylus, Inc. produces an electric hand mixer which has been very successful in the market. Annual capacity is 500,000 units. Sales and production for the coming year are predicted to be 400,000 units. Standard production costs are estimated as follows: Materials $6.50; Direct labor $4.00; Variable indirect labor $2.00; Fixed overhead $3.00; for a total allocated cost per unit of $15.50.
Stylus also incurs fixed selling expenses of $1.50 per unit and variable warranty repair expenses of $1.20 per unit. The company currently charges $20 per unit to its retail department store customers. This price is expected to hold during the coming year.
Just recently Stylus has received an inquiry from a large discount chain store about purchasing a large number of these hand mixers. The discount chain store presented two different purchase offers:
Offer #1: The discount chain store would purchase 80,000 units at $14.60 per unit. These units would bear the Stylus label and be covered by Stylus’ warranty.
Offer #2. The discount chain store would purchase 120,000 units at $14.00 per unit. These units would be sold under the discount chain store’s own label and Stylus would not provide warranty service.
Tasks:
1. Evaluate the incremental net income potential of each offer. Show ALL work.
2. What factors in addition to the net income potential should Stylus consider when deciding which offer to accept?
3. Which offer (if either) should Stylus accept? Why?