Childs Play Company

Childs Play Company makes a plastic rattle for toddlers. The rattle is generally marketed through exclusive retailers located in upscale shopping malls. In late 2018, Diana Suarez, the president of the company, was considering an alternative marketing plan for 2019 that was presented to her by Bill Duffy, the marketing manager. Based on sales from January through September 2018, Diana expected that 2019 sales would amount to 300,000 units. Bills alternative marketing plan is presented below:

2019 Marketing Plan: At the present time, we sell the product to retailers for $8.00 per rattle. 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 $4,600 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 20 percent to 360,000 units in 2019.

Diana received cost data from the companys CFO, Don Capp. Don expects that the cost data below are also reliable estimates for 2019 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 $50,000 per machine.

2018 Cost Data Manufacturing Costs for rattles (based on production volume of 300,000 units):

Direct Materials Direct Labor Packaging Variable Manufacturing Overhead Fixed Manufacturing Overhead

$0.80 per unit $10 per hour (each worker can make 20 units in 1 hour) $0.75 per unit $1.20 per unit $540,000

Selling and Administrative Costs for rattles (based on sales volume of 300,000 units):

Sales Commissions Shipping Costs Advertising and Promotion (fixed) Fixed Selling and Admin Expenses

$0.80 per unit $0.50 per unit $180,000 $270,000

1Assuming the selling price and cost changes in the Marketing Plan are adopted, determine the number of rattles the company would need to sell in 2019 in order to earn $100,000 in profit. For full credit, please show the elements of your computations. Round to the nearest next whole unit.

Part 2

Childs Play has been approached by the government, which is seeking to buy 150,000 rattles for its day care centers in 2019. The proposed government contract states that the government would pay Childs Play a price of $4.25 per rattle. If Childs Play 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 Childs Play does not adopt the proposed Marketing Plan and that the companys production and sales level without the government contract is expected to be 300,000 rattles for 2019.

1. Prepare an analysis below to determine the incremental net income or net loss that Childs Play would recognize if they accept this special order.

2. Should Childs Play accept or reject the government contract?

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