The Cloud Burst Sprinkler Company of Benicia, California has been manufacturing and selling a water efficient sprinkler exclusively to Home Depot for the last two years. Although there is not a binding contract that gives Home Depot exclusive rights to buy and stock the sprinkler in their network of locations, Cloud Burst has placed a great deal of importance on keeping Home Depot locations across the country and Canada fully stocked with their water efficient sprinkler. ACE Hardware has approached Cloudburst indicating they would like to stock the water efficient sprinkler in their 2,350 stores west of the Mississippi. The initial proposal submitted by ACE is to purchase 56,400 sprinklers which will result in two dozen sprinklers stocked in each store. The proposal received from ACE will NOT affect fixed costs, however, ACE has requested a special onetime quantity wholesale discount price of $5.25 per sprinkler Cloud Burst Sprinkler Company achieved the following operating results while operating results while selling 100,000 sprinklers exclusively to Home Depot: Sales to Home Depot $675,000 Cost of goods sold 405,000 Gross profit 270,000 Operating expenses 105,000 Net income $ 165,000 Cost of goods sold is 100% variable; operating expenses are 20% variable and 80% fixed. Instructions: (a) Prepare an incremental analysis for the ACE Hardware proposal. (b) Should the Cloud Burst Sprinkler Company accept the ACE Hardware proposal. (c) What “Qualitative” Factors should the Cloud Burst Sprinkler Company be thinking about and considering when making a final decision to accept or reject the proposal from ACE Hardware ?
The Cloud Burst Sprinkler Company of Benicia, California has been manufacturing and selling a water efficient sprinkler exclusively to Home Depot for the last two years. Although there is not a binding contract that gives Home Depot exclusive rights to buy and stock the sprinkler in their network of locations, Cloud Burst has placed a great deal of importance on keeping Home Depot locations across the country and Canada fully stocked with their water efficient sprinkler.
ACE Hardware has approached Cloudburst indicating they would like to stock the water efficient sprinkler in their 2,350 stores west of the Mississippi. The initial proposal submitted by ACE is to purchase 56,400 sprinklers which will result in two dozen sprinklers stocked in each store.
The proposal received from ACE will NOT affect fixed costs, however, ACE has requested a special onetime quantity wholesale discount price of $5.25 per sprinkler Cloud Burst Sprinkler Company achieved the following operating results while operating results while selling 100,000 sprinklers exclusively to Home Depot:
Sales to Home Depot $675,000
Cost of goods sold 405,000
Gross profit 270,000
Operating expenses 105,000
Net income $ 165,000
Cost of goods sold is 100% variable; operating expenses are 20% variable and 80% fixed.
Instructions:
(a) Prepare an incremental analysis for the ACE Hardware proposal.
(b) Should the Cloud Burst Sprinkler Company accept the ACE Hardware proposal.
(c) What “Qualitative” Factors should the Cloud Burst Sprinkler Company be
thinking about and considering when making a final decision to accept or reject the proposal from ACE Hardware ?
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