The Tartar Company, manufactures a number of different consumer products and consists of a headquarters and three divisions: Division A, B, C respectively. Each division competes vigorously with the others for funding. You are the head of Division C.
One of your design teams has come up with an idea to sell more toothpaste by repackaging it so that the tube is one-sixth wider than existing tubes.
This, they reason will increase sales. To test this packaging, your division successfully test marketed the new tubes of toothpaste four months ago at a cost of $300,000. The new toothpaste will be stored in a vacant floor of a huge warehouse belonging to your firm.
The warehouse has three floors. Division A and B each use one floor for their own products. The floor you plan to use has always stood vacant. The total overhead on the warehouse is $120,000 a year for utilities, cleaning and security. If your toothpaste is stored the overhead will rise to $150,000. You have just received a fax forwarded to you from the head of Division A from a commercial realtor.
The realtor believes that the vacant floor could be rented out starting next month for $20,000 a month. If your toothpaste is produced and sold it will reduce sales of Division B's slim-line toothbrushes by $ 600,000 a year since these toothbrushes are too narrow to hold your new toothpaste.
Finally, concerned about possible litigation, you will need to retain the services of the law firm of Dewey, Fleecum & Howe at a cost of $300,000 a year if the new toothpaste is introduced. Use all the facts above in our deliberations of what the cash flows for the new toothpaste line should be.
In particular, what should the new toothpaste line be charged for:
a. The test marketing costs:
b. Its share of the utility bill for the warehouse:
c. Any opportunity costs:
d. Any other relevant costs: