Case 1 Cost-Volume-Profit (CVP) analysis + marginal analysis

You are the manager in Bright company that produces paper bags for food shops and supermarkets. You are provided with following information:

Bright company is able to produce 100,000 packs of bags.

Its current sale volume is 80,000 packs of bags per year. This has achieved its maximum sale force.

Current selling price is $20 per pack of bags.

Variable costs in total are $400,000;

Fixed costs are $ 160,000.

A newly established shop has approached you, informing a willingness of purchasing 15,000 packs of bags per year at a price of $10 for each bag. If this proposal is accepted, unit variable costs would remain the same however fixed costs would increase by $60,000 per year.

Required:

(1)Discuss whether this proposal is worthwhile from a financial point of view.

(2)Analyze, if your competitor in the paper industry knows the above cost and price information, what action(s) may the competitor take to beat you in the market.