Clear Creek Manufacturing makes backpacks, tote bags, and other similar types of products in its factory in Pennsylvania. Historically, the company has specialized in fabric bags made of cotton, canvas, or fabric from recycled plastic bottles. Clear Creek has not created a brand name product of their own. They are strictly a contract manufacturer.

This Fall, Bill Weber, the current President of Clear Creek, was approached by two very different customers. Emma Morris is a company that designs stylish, premium-priced bags and accessories. The firm sells its products directly to the customer via its website and company-owned stores. Gold Circle, a mass market, discount retailer, wanted a one-time contract for a summer promotion.

He was able to accept both contracts. They are currently being manufactured during the first quarter of 2022 (January through March).

Bill is working on the production schedule for the second quarter (April, May, and June). Here are the facts he needs to consider:

• Clear Creek has not signed any formal contracts for the three months beginning in April (April, May, and June).
• Total fixed costs are $500,000 per month.
• The factory can make a maximum of 200,000 units per month.
• Because Clear Creek has always done contract work, the factory has been divided into four separate, completely self-contained workshops. Each of the four workshops can produce 50,000 units per month at a fixed cost of $125,000 per workshop per month. For ethical and logistical reasons, a workshop can only be assigned to one client per month. This is a diagram to help you picture the set up:

Workshop 1:	Workshop 2:
Can produce up to 50,000 items per month	Can produce up to 50,000 items per month
Overhead cost per month is $125,000	Overhead cost per month is $125,000
Workshop 3:	Workshop 4:
Can produce up to 50,000 items per month	Can produce up to 50,000 items per month
Overhead cost per month is $125,000	Overhead cost per month is $125,000

• Total fixed costs need to be paid monthly whether or not the factory is running at full capacity.
• The company ships products at the end of each month. Goods arrive on or before the 10^th of the following month.
• Clear Creek does not store customers products for shipment at a later date.

Bill Weber has received inquiries from three different companies. Here are the details for each opportunity:

Emma Morris:

• Emma Morris is very happy with the quality and service they have received from Clear Creek Manufacturing. Emma Morris has loyal customers and stable sales. The company values quality workmanship and likes to establish long-term relationships with their suppliers and their retailers.
• The companys current order is for a new line of messenger bags that the company introduced at the beginning of this year. This is not a seasonal product. It is expected to be a permanent addition to their product line.
• Sales and pre-orders are better than the company had initially projected. The company is interested in buying 43,750 messenger bags per month. If sales increase at the current rate, production could be 55,000 bags per month by July.
• The company does not want inventory sent early. Therefore, only 43,750 bags should be shipped each month. Of course, if production increases all of the items would be shipped at the end of the month.
• The company signed a three-month contract for January through March. They are interested in signing another three-month contract but have asked if Clear Creek would be willing to consider a longer-term contract in the future.
• Emma Morris will pay $45.00 per bag.
• Variable costs are $25.55 per bag.

Gold Circle:

• Gold Circle is interested in the lowest price possible and tends to change vendors frequently. However, they think they have miscalculated the number of bags they will need for the summer promotion so they have asked Bill Webber if he can make a few more.
• The company is interested in buying 80,000 additional tote bags.
• The merchandise must arrive on or before May 15^th.
• Gold Circle will pay $10.10 per bag.
• Variable costs are $5.56 per bag.

Granville Wallace:

• Granville Wallace is a relatively new, fast-growing company. They sell leather goods: wallets, covers for travel journals, and other small cases. The company has been manufacturing goods in Thailand but thinks that a Made in America label will allow them to charge higher prices for their products.
• The company wants an initial three-month contract. Granville Wallace would like to determine whether Clear Creek can manufacture fine leather goods at the same high quality that they make canvas goods. Granville Wallace is not interested in signing a shorter-term contract.
• Sales are currently modest but have increased 50% in the last year.
• Granville Wallace has some inventory on hand so they would like to make only one of their products (the covers for travel journals) at Clear Creek in the following quantities:
  • April: 55,000 units
  • May: 47,500 units
  • June: 47,500 units
• Granville Wallace will pay $49.00 per cover.
• Variable costs are $30.00 per cover.

Your assignment:

Bill Weber has asked you to calculate the following data:

Evaluate the Gold Circle contract. Assume this is the only contract Clear Creek accepts for the three-month period.

5. The breakeven quantity for the Gold Circle contract.