Blossom Plus manufactures small private$-$label electronic products, such as alarm clocks, stopwatches, kitchen timers, calculators, and

automatic pencil sharpeners. It sells some of the products as sets and others individually. The company studies the products for their

sales potential and then makes cost estimates. The engineering department develops production plans, and then production begins.

The company has generally had very successful product introduction. It has discontinued only two products it has introduced.

One of the products it currently sells is a multi$-$alarm alarm clock. The clock has four alarms that can be programmed to sound at

various times and for varying lengths of time. The company has had a lot of trouble making the circuit boards for the clocks. The

production process has never operated smoothly. The product is currently unprofitable, mainly because of warranty repairs and

product recalls. Two models of the clocks were recalled, for example, because they sometimes caused an electric shock when the

alarms were being shut off. The engineering department is trying to revise the manufacturing process, but the revision will take

another six months at least.

The clocks were very popular when they were introduced, and since they are a private label, the company has not suffered much from

the recalls. Presently, the company has a very large order for several items from a major retailer with locations across Canada. The

order includes $4,400$ of the multi$-$alarm clocks. When the company suggested that the retailer purchase the clocks from another

manufacturer, the retailer threatened to cancel the entire order unless the clocks were included.

The company has therefore investigated the possibility of having another company make the clocks for it$.$ Its bid for the retailer's order

was based on an estimated $$6\mathrm{.}99$ cost to manufacture the clocks, broken down as follows:

Circuit board, $1$ each @ $$2\mathrm{.}40$

$$2\mathrm{.}40$

Plastic case, $1$ each @ $$0\mathrm{.}60$

$0\mathrm{.}60$

Alarms, $4$@$$0\mathrm{.}11$ each

$0\mathrm{.}44$

Labour, $15$ minutes @ $$12/$hour

$3\mathrm{.}00$

Overhead, $$2\mathrm{.}20$ per labour hour

$0\mathrm{.}55$

Blossom Plus could purchase clocks to fill the retailer's order for $$11\mathrm{.}00$ from Pharoah Star, a Korean manufacturer with a very good

quality record. Pharoah Star has offered to reduce the price to $$8\mathrm{.}00$ after Blossom Plus has been a customer for six months and

agrees to order at least $1,000$ units per month. If Blossom Plus becomes a "preferred customer" by purchasing $16,000$ units per year,

Pharoah Star would reduce the price still further to $$5\mathrm{.}00.$

Steering Products, a local manufacturer, has also offered to make clocks for Blossom Plus. It has offered to sell $4,400$ clocks for $$5\mathrm{.}00$

each. However, Steering Products has been in business for only six months. It has had significant employee turnover, and the local

press has reported that the owners may face tax evasion charges soon. The owner of Steering Products is an electronics engineer,

however, and the quality of the clocks is likely to be good.

If Blossom Plus decides to purchase the clocks from either Pharoah Star or Steering, all of its current costs to manufacture the alarm

clock could be avoided, except a total of $$4,400$ in overhead costs for machine depreciation. The machinery is fairly new and has no

alternative use.

$($a$)$

Calculate the profit under each of the alternatives if the clocks are to be sold for $$15\mathrm{.}50$ each to the retailer.

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