Aerotek Apparel Company

Aerotek Apparel Company produces clothing and accessories, with a specialty in discount leather wallets and sells them to retailers who sell them directly to consumers. In December 2019, the president of the company, was considering an alternative marketing plan for 2020 that was presented to her by the marketing manager. Based on sales from January through December 2019, the president expected that 2020 sales would amount to 295,000 units. The alternative marketing plan is presented below:

2020 Marketing Plan: At the present time, we sell the product to retailers for $8.00 per wallet. Retailers generally charge the consumers between $9 and $9.50. If we cut our selling price to retailers to $7.50, 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 $5,500 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 18 percent to 348,100 units in 2020.

Jackson received cost data from the companys CFO. The CFO expects that the cost data below are also reliable estimates for 2020 for a production volume up to 400,000 units. Beyond 400,000 units, the company would have to rent additional machines (with a capacity of 100,000 units each), which would increase fixed manufacturing overhead costs by $45,000 per machine.

2019 Cost Data Manufacturing Costs for wallets (based on production volume of 295,000 units):

Direct Materials: $0.80 per unit Direct Labor: $9.50 per hour (each worker can make 20 units in 1 hour) $0.65 per unit Packaging: $1.55 per unit Variable Manufacturing Overhead: Fixed Manufacturing Overhead: $500,000

Selling and Administrative Costs for wallets (based on sales volume of 295,000 units):

Sales Commissions: $0.85 per unit Shipping Costs: $0.45 per unit Advertising and Promotion (fixed): $200,000

Fixed Selling and Admin Expenses: $250,000

Answer the following questions. Include all costs (manufacturing costs and selling and administrative costs) in your calculations.

Question 4

The company has been approached by the government, which is seeking to buy 170,000 wallets for its charity campaign in 2020. The proposed government contract states that the government would pay Aerotek a price of $4.25 per wallet. If Aerotek decides to accept this special order, they would avoid packaging costs for this contract as well as all

variable selling and administrative costs. The companys capacity is limited to only 400,000 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 companys estimated cost data and additional machine rental cost. Assume that Aerotek does not adopt the proposed Marketing Plan and that the companys production and sales level without the government contract is expected to be 295,000 wallets for 2020.