In February 2016,Don Roberts,director of Clairtone Inc., a small Hamilton, Ontario manufacturer

and retailer of high quality headphones and headsets, had just met with a purchasing agent from

2001 Audio, a major Canadian electronics retailer. The agent had approached Roberts regarding

the possibility of carrying a line of Clairtone headphones, which involved a potential order of over

three times the number of headphones currently being manufactured each year.

However,during the meeting it became apparent that 2001 Audio had expected a price much lower

than Clairtone was prepared to offer. Don was wondering if it would be possible to agree upon a

price, and if so, was it in the best interests of his company to supply headphones to a large retailer

such as 2001 Audio. As he left the meeting at the retailer's office, Don was aware that he would

have to contact the purchasing agent within a few weeks.

COMPANY BACKGROUND

Clairtone was started in 1990 by Frank Roberts, Don's father. Frank, an experienced sound

engineer and electronics tinkerer, decided to specialize in the area of headphones for people with

poor hearing (especially at the higher end of the sonic range of 16,000hz to 20,000hz), a market

that had not been fully developed. Typically, as people age they become less able to distinguish

very high pitched sounds which can affect their enjoyment of music.

Mr Roberts originally concentrated on custom-made specialised headphones made to order, but

eventually expanded into high quality lightweight on the ear headphones and later headsets.As

time passed. the headphones became his major retail segment.

Over the years, the company's image had evolved from catering to those who had lost some of

their hearing range to one of providing high quality sound As these products became more

popular. Clairtone's reputation for value (good quality at a reasonable price) attracted a customer

base that while not very large,was loyal and was growing gradually

In 2006, Don joined his father in the small family business, after studying Business Administration

at Sheridan College. One of the first things that Don did was set up a corporate website and begin

to engage on social media.He found that these were good for attracting interest, but very little

sales,as people wanted to try the neacphones before purchasing

The manufacturing and retall facilities were located in the same building in Hamilton.Two product

lines were manufactured: Clairtone an over the ear headphone with custom moulded earpleces for

mature adults designed to let you hear sounds that only young people can'land Booster.a

headset for those who worked in call centres, but had hearing difficulties.

These lines sold in the company's own retail store and were also distributed to a small number of

selected stores in southern Ontario. Other lines carried in the retail store but not manufactured by

Clairtone included Klipsch, Bose, and Sennheiser, all imported from Germany, a cuntry with a

good reputation in high end audio equipment. The Company did not compete in the popular lines of

headphones and earbuds made by companies such as Beats by Dr Dre, Skullcandy, or Monster.

For some time, Don had wanted to increase the company's manufacturing activities, so as to make

better use of its underutilized plant facilities. Expansion was also planned on the retail side,

including an increase in both the number of retailers and additional product lines, by adding other

hearing and audio supplies to the mix.

MEETING WITH 2001 Audio

A representative from the 2001 Audio chain of stores had been impressed by a review for Clairtone

in AudiophileReview.com, a leading high end audiophile blog and review website.Roberts was

contacted,and a meeting was arranged at 2001 Audio's headquarters in Toronto in February 2016.

The 2001 Audio purchasing agent expressed interest in distributing Clairtone headphones to all of

their major retail stores and featuring it in their online store.

First year volume was estimated by 2001 Audio to be as high as 20,000 sets. However, when the

topic of price was raised, it became apparent to Don that Clairtone's regular wholesale price of

S135.00 was totally unacceptable to 2001 Audio. Although the meeting ended without a counter

offer from 2001 Audio. Don got the impression that 2001 Audio wanted a price in the S100.00 to

S110.00 range. lt was decided that the two parties would be in contact in a few weeks when Don

would send the agent several pairs of headphones for closer examination.

THE COSTING OF CLAIRTONE HEADPHONES

The cost of a pair of Clairtone headphones consisted of materials, labour and overhead.

Material costs included:

frame:

S12.50 per set

electronics

22.50 per set

earpiece:

20.00 per set

packaging:

5.00 per set

labour cost:

25.00 per set, based on time studies.

overhead costs: S25.00 per set,calculated as follows. overhead (fixed) costs of S150.000 per

year divided by the current production level of 6 000 headsets per year.

Although only 6,000 units of Clairtone headphones were currently being manufactured annualiy

about 500 pairs per month), production of 26,000 sets per year (over 2,000 pairs per month)could

be accommodated by the plant.

Don estimated that if production were increased to the level required by the 2001 Audio contract,

the costs of gearing up production capacity, including hiring new employees, to the higher level

would be about $5.00 per headphone set produced.

Decision Time

One of Don's major corporate objectives was to increase the company's manufacturing activities,

as the plant was underutilized. However, he was not sure whether te contract with 2001 Audio

was the best way to do this. He was extremely reluctant to lower his wholesale price, since he was

already undercutting his major competitors by 20%.

On the other hand, he realized that a contract with 2001 Audio would allow the Clairtone brand to

become established across Canada within a year. He felt that being carried by a major electronics

store could enhance his company's image, and that it would be easier to deal with one customer

with a large volume of sales. However, Don was also concerned by the prospect of devoting about

80% of his capacity to one customer.

He might also face problems with his suppliers, especially the electronics, which came from

Germany:shipments of which tended to arrive late. At the current low level of production, this was

not a major problem. However, Don was unsure how this problem would affect his company at the

much higher production levels involved in the 2001 Audio contract.

He also wondered whether or not a high quality specialised headphone was suitable for mass

merchandising, and what effect the possibility of a lower retail price by 2001 Audio might have on

his own retail business and on his sales and prices through other retailers. In addition, expansion

would mean the hiring of additional workers.

As he drove back from Toronto to Hamilton,Don realized that his decision could drastically change

the nature of his company. His initial reaction was that he could not afford to lower the wholesale

price,but he wanted to expand production and knew that $135.00 would not be an acceptable price

to 2001 Audio. Within a few weeks he had to contact the company, and wondered what he should do

Alternatives & Decision Criteria - Minimum of three alternatives. One short sentence to describe each if necessary. Make sure that your alternatives address the problem. If not, you may need to restate the problem or eliminate the alternative. Separate this section from your analysis (see below) - List the four-six main criteria that the decision maker will use to analyse the alternatives. Two criteria risk and return (profit) will be included in almost all the case studies - therefore no marks for these. 20 Analysis - Separate section from Alternatives. - Do whatever analysis you think is necessary to evaluate each alternative keeping in mind your decision criteria - Pros/Cons is acceptable, but I'd prefer sentences and paragraphs. - If your analysis has a large financial component, place table at the end of the section that summarises the financial results of the alternatives. Recommendation - You must have a sentence that says, I/We recommend Alternative..." - Do not combine alternatives (if you wish to do so, do it at the alternative stage) - Present your rationale for selecting the Alternative; how does it best solve the Problem Statement and Objectives. Why is your recommendation better than the other alternatives? Alternatives & Decision Criteria - Minimum of three alternatives. One short sentence to describe each if necessary. Make sure that your alternatives address the problem. If not, you may need to restate the problem or eliminate the alternative. Separate this section from your analysis (see below) - List the four-six main criteria that the decision maker will use to analyse the alternatives. Two criteria risk and return (profit) will be included in almost all the case studies - therefore no marks for these. 20 Analysis - Separate section from Alternatives. - Do whatever analysis you think is necessary to evaluate each alternative keeping in mind your decision criteria - Pros/Cons is acceptable, but I'd prefer sentences and paragraphs. - If your analysis has a large financial component, place table at the end of the section that summarises the financial results of the alternatives. Recommendation - You must have a sentence that says, I/We recommend Alternative..." - Do not combine alternatives (if you wish to do so, do it at the alternative stage) - Present your rationale for selecting the Alternative; how does it best solve the Problem Statement and Objectives. Why is your recommendation better than the other alternatives