Special Order Earth Baby Inc. (EBI) recently celebrated its 10th anniversary. The companyproduces organic baby products for health-conscious parents. These products include food,clothing, and toys. Earth Baby recently introduced a new line of premium organic baby foods.Extensive research and scientific testing indicate that babies raised on the new line of foodswill have substantial health benefits. EBI is able to sell its products at prices higher than thosecharged by its competitors because of its excellent reputation for superior products. EBI distributesits products through high-end grocery stores, pharmacies, and specialty retail baby stores.Joan Alvarez, the founder and CEO of EBI, recently received a proposal from an old businessschool classmate, Robert Bradley, the vice president of Great Deal Inc. (GDI), a large discountretailer. Mr. Bradley proposes a joint venture between his company and EBI, citing the growingdemand for organic products and the superior distribution channels of his organization. Underthis venture EBI would make some minor modifications to the manufacturing process of some ofits best-selling baby foods, and the foods would then be packaged and sold by GDI. Under theagreement, EBI would receive $3.10 per jar of baby food and would provide GDI a limited rightto advertise the product as manufactured for Great Deal by EBI. Joan Alvarez set up a meetingwith Fred Stanley, Earth Baby’s CFO, to discuss the profitability of the venture. Mr. Stanley madesome initial calculations and determined that the direct materials, direct labor, and other variablecosts needed for the GDI order would be about $2 per unit as compared to the full cost of $3(direct materials, direct labor, and manufacturing overhead) for the equivalent EBI product.Required Should Earth Baby Inc. accept the proposed venture from GDI? Why or why not? Include inyour answer strategic considerations.
Special Order Earth Baby Inc. (EBI) recently celebrated its 10th anniversary. The company
produces organic baby products for health-conscious parents. These products include food,
clothing, and toys. Earth Baby recently introduced a new line of premium organic baby foods.
Extensive research and scientific testing indicate that babies raised on the new line of foods
will have substantial health benefits. EBI is able to sell its products at prices higher than those
charged by its competitors because of its excellent reputation for superior products. EBI distributes
its products through high-end grocery stores, pharmacies, and specialty retail baby stores.
Joan Alvarez, the founder and CEO of EBI, recently received a proposal from an old business
school classmate, Robert Bradley, the vice president of Great Deal Inc. (GDI), a large discount
retailer. Mr. Bradley proposes a joint venture between his company and EBI, citing the growing
demand for organic products and the superior distribution channels of his organization. Under
this venture EBI would make some minor modifications to the manufacturing process of some of
its best-selling baby foods, and the foods would then be packaged and sold by GDI. Under the
agreement, EBI would receive $3.10 per jar of baby food and would provide GDI a limited right
to advertise the product as manufactured for Great Deal by EBI. Joan Alvarez set up a meeting
with Fred Stanley, Earth Baby’s CFO, to discuss the profitability of the venture. Mr. Stanley made
some initial calculations and determined that the direct materials, direct labor, and other variable
costs needed for the GDI order would be about $2 per unit as compared to the full cost of $3
(direct materials, direct labor, and manufacturing overhead) for the equivalent EBI product.
Required Should Earth Baby Inc. accept the proposed venture from GDI? Why or why not? Include in
your answer strategic considerations.
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