Chapter 7 10 Point Quiz:

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 4,192 stores across the United States. The initial proposal submitted by ACE is to purchase 50,304 sprinklers which will result in a dozen sprinklers stocked in every store.

The proposal received from ACE will NOT affect fixed costs, however, ACE has requested a special onetime quantity wholesale discount price of $5.80 per sprinkler

For the first 6 months of 2022, Cloud Burst Sprinkler Company achieved the following operating results while operating at 63% capacity and selling 100,000 sprinklers exclusively to Home Depot:

Sales to Home Depot $675,000

Cost of goods sold 435,000

Gross profit 240,000

Operating expenses 115,000

Net income $ 125,000

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 think about and consider?