Question

Baby Center Ltd Baby Center Ltd. makes portable high chairs. The high chair is generally marketed through exclusive retailers located in upscale shopping malls. In late 2018, Diana Suarez, the president of the company, was considering an alternative marketing plan for 2019 that was presented to her by Bill Duffy, the marketing manager. Based on sales from January through October 2018, Diana expected that 2019 sales would amount to 20,000 units. Bill's alternative marketing plan is presented below: 2019 Marketing Plan: "At the present time, we sell the product to retailers for $64.00 per high chair. Retailers generally charge the consumers between $74.99 and $79.99. If we cut our selling price to retailers to $62.00, I expect that the product will do much better. Their increased markup will give them the incentive to display our product more prominently and to promote it more vigorously to customers We should support this strategy by supplying more promotional materials to retailers, which I expect would be an increase of $4,400 in Advertising and Promotion costs. Based on the price cut and the increase in Advertising and Promotion, I expect that we will be able to boost our sales volume by 25 percent to 25,000 units in 2019." Diana received cost data from the company's CFO, Don Capp. Don expects that the cost data below are also reliable estimates for 2019 for a production volume up to 30,000 units. Beyond 30,000 units, the company would have to rent additional machines (with a capacity of 10,000 units each), which would increase fixed manufacturing overhead costs by $12,000 per machine 2018 Cost Data Manufacturing Costs for high chairs (based on production volume of 20,000 units): Direct Materials Direct Labor Packaging Variable Manufacturing Overhead $4 per unit Fixed Manufacturing Overhead $110,000 $24 per unit $15 per hour (each worker can make 2 units in 1 hour) $3.25 per unit Selling and Administrative Costs for high chairs (based on sales volume of 20,000 units): Sales Commissions Shipping Costs Advertising and Promotion (fixed) $18,000 Fixed Selling and Admin Expenses $8,000 $6.75 per unit $4.00 per unit

Baby Center Ltd. has been approached by the government, which is seeking to buy 15,000 high chairs for its day care centers in 2019. The proposed government contract states that the government would pay Baby Center a price of $42 per high chair. If Baby Center decides to accept this special order, they would avoid packaging costs for this contract as well as all variable selling and administrative costs. The company’s capacity is limited to only 30,000 units. If they accept the government contract, they will need to increase their capacity by renting an additional machine. Refer to page 1 for the company’s estimated cost data and additional machine rental cost.

Assume that Baby Center does not adopt the proposed Marketing Plan and that the company’s production and sales level without the government contract is expected to be 20,000 high chairs for 2019.

1. Prepare an analysis below to determine the incremental net income or net loss that Baby Center would recognize if they accept this special order.

2. Should Baby Center accept or reject the government contract?

Answer 1

The answer has been presented in the supporting sheets. All the parts has been solved with detailed explanation and format. For detailed answers refer to the supporting sheets.

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