Centre Island Kayaks has been manufacturing a premium line of sea kayaks for the past 12 years. These kayaks are marketed throughout North America in specialty stores and are among the highest quality and highest priced kayaks on the market. About 85% of the companys sales are in the United States, the remainder in Canada. The company is proud of its kayaks, which frequently win awards for its design. The company makes one model which it sells to the specialty stores at a price of $1,890. The average selling price of the kayak is $2,900.

Unfortunately, because of the weak growth of the sport, the market for the high-end kayak has been declining for several years. Kayaks tend to last a long time and the high end market is saturated. As a consequence, annual demand for Centre Island Kayaks has peaked at 740 units and is forecast to remain at that level over the next three years. The company has not anticipated the flat growth in demand and recently expanded its facilities. It now has the capacity to produce 1,100 kayaks annually. The companys income statement for the previous year, in which it sold 740 kayaks is set out below:

INCOME STATEMENT

$

Revenue

1,398,600

Material

160,000

Labour

320,000

Fixed overhead

350,000

Variable overhead

60,000

Cost of goods sold

890,000

Marketing

260,000

Commissions

139,860

Administration

135,000

Total expenses

534,860

Loss

(26,260)

Mountain Co-op is a Canadian cooperative retail chain with stores in several Canadian cities. It has recently approached Centre Island Kayaks and requested that the company prepare a private label its kayak for sale by Mountain Coop. The retailer has offered a long-term contract to purchase 300 kayaks annually for the next years at a price of $1,100 per kayak. It is not willing to pay a higher price because it plans to sell the kayak at a retail price of only $1,695. Because this sale would involve a private label for an existing model, the company would have no development costs for this order. Furthermore, it would not have to pay its regular commission rate of 10% as the order was not brought in by the sales force.

The president of Centre Island Kayaks is interested in the Mountain Co-op offer even though the price is well below Centre Islands normal price. The presidents one concern is that the company may see a decline in sales with existing retailers, in that some customers will comparison shop and find the same-quality kayak available at a lower price in Mountain Co-op stores. The president has engaged you, a well respected business consultant, for help in deciding what to do.