“Percy,” Janet Roberts called as her son walked into the restaurant. “Over here”

“Hi, Mom,” Percy said as he joined Janet at her table. He gave her a quick kiss on the cheek before sitting down next to her. “How are you?”

“Just fine, just fine. And how’s my little boy doing?”

Percy smiled and shook his head. If he lived to be 100 years old, he’d still be a little boy to his mom. “I’m doing fine, too. Work is good; really busy, but I can’t complain. I have a good staff now to help with a lot of the work.”

“That’s great, dear.” Janet signaled the waiter who hurried over to take their order.

Once the waiter left, Percy looked over at his mom. She was getting older and a little greyer, but she was still very sharp. “Mom, why are we here?” he asked after studying her for a minute.

“Do we need a reason?” Janet asked, surprised.

“No, but you always have one, and usually one I’m not going to like very much.” Percy leaned back and crossed his arms. “Now, tell me what’s up.”

Janet chuckled. “I never could put one over on you, not even when you really were my little boy. Well, here goes then. I’ve been contacted by Snack Snobs. It’s a very large chain in the South, and they would very much like to stock our new line of Garlic & Pepper in their stores. We’re talking high-end customers; a great opportunity to not only make some money but also get our product in front of a nice clientele.”

“Sounds great, so what’s the catch?” Percy started drumming his fingers on the table. Any time his mom made him wait this long it was not good news.

“Well, they want to make a large order, the first of many, remember, and they would like a special discount.”

Percy shrugged. “You offer discounts all the time, Mom. That’s your job as Wedgewood’s Director of Marketing. Why do you need to talk with me about it?”

“Because of their offer.” Janet placed an email on the table. “I presented them with our normal prices and the discount I was willing to offer, and they countered with this.” (The email is at the end of this document)

Percy picked up the email, but had to wait to read it until their food was served. When he did his eyes opened in surprise. “Mom, this is not just a normal discount. They’re asking for a huge discount. We only sell the 12 oz. bags for $6.60 right now anyway.”

“I know. That’s why I brought you in on the decision. You know that I’m no good with numbers, never have been. So I thought you could help me make the decision. Just remember, they are offering to buy quite a few chips in exchange for that special price.”

“I don’t know, Mom. I’m not sure I even need to run the numbers. This is a very low offer. I don’t think we would make any profit at all, and I doubt we could raise the price on them later. You might be committing us to a long-term relationship with no profit at all.”

“But think of the marketing campaign it would be. We could sell the Garlic & Pepper chips in their shops as a hook, and then get their wealthy customers to buy our other chip varieties at the normal price.”

Percy frowned. “Why would they do that? Wouldn’t they just pick up a new batch every time they go to the shops?”

Janet waived her hand dismissively. “Of course not. These people aren’t cost conscious with anything under a $100. They won’t care. We’ll market directly to them and make a bundle on selling them large bags for their large parties. I think it’s worth it.”

Percy shook his head. There was very little reasoning with his mom once she got an idea like this stuck in her head. At least, not without numbers to back him up. “I’ll tell you what, Mom. Let’s enjoy lunch, then I’ll take these back to the office and run some calculations and scenarios. I’ll get you my answers as soon as I can.”

“Thanks, Percy,” Janet said as she patted his hand. “I knew I could count on you.”

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“Jennifer,” Percy called as he hurried up to his senior staff accountant in the hall of the Roberts offices. “I need you to run some numbers for me.”

“Okay, Percy, what do you need?” Jennifer asked.

“Well, we’ve been offered a special order contract and we need to decide if we should accept the offer or not. Here’s their offer and some of our production numbers.” He handed her the email he had received from his mom at lunch an hour earlier and the Contribution Margin Income Statement for the Garlic & Pepper chip line for the last quarter. “One more thing. We sell everything we produce; there is no beginning or ending inventory. Run the numbers, and then let me know what you recommend we do.”

Jennifer nodded. “No problem, boss. Just one question.”

Percy nodded. “Go ahead.”

“Well, I haven’t talked with anyone in production for a while. Are we at capacity already on the new line or not?”

Percy constricted his brow. “You know, I’m not sure. Why don’t you run the numbers both ways, then we’ll be ready for whatever questions the executive team asks. Oh, and before I forget, the variable S&A is a 10% commission, so when the sales price drops, so will variable S&A.”

“Makes sense. I’ll get these back to you as soon as I can.” Percy watched Jennifer walk down the hall. He hoped the numbers came out badly. It would be so much easier to convince her mom not to accept this kind of long-term arrangement if the numbers were not in her favor.

1. What are the typical variable costs/unit for a 12 oz. bag of Garlic & Pepper chips?

2. What are the average fixed costs/unit for a 12 oz. bag of Garlic & Pepper chips.

3. If the line has excess capacity, what would be the profit (loss) on the special order? What if no sales commissions were paid on the order?

4. IF the line is operating at full capacity, what would be the profit (loss) on the special order? What if no sales commissions were paid on the order?

5. Based on your analysis, do you think Wedgewood should accept the special order? Explain your answer.

6. After talking with Pierre, the manager of the new line, Percy estimates that the Garlic & Pepper chips can produce a maximum of 2,200,000 ounces of chips each year, but is only producing about 2,000,000 ounces currently.

a. Using these capacity numbers, figure out the profit (loss) on the special order.

b. Based on this calculation, what do you think the company should do?

c. How much would Roberts have to charge Snack Snobs to break even in this situation?

From: Ronald Graves

Sent: Mon 11/7/2016 8:30 AM

To: Janet Roberts

CC:

Subject: Placing Order

Mrs. Roberts, I very much enjoyed your presentation to our committee last week. While we do not typically carry many potato chips in our establishments, we believe that your Garlic & Pepper line is of high enough quality that our customers might be interested in them. With that in mind, we would like to place an order for 25,000 12 oz. bags of chips.

Because of the size of our order we hope that you would be willing to consider a discount of $1.50 per bag. In addition, we would be willing to pay actual shipping charges for overnight delivery once production is done. We want to start stocking these chips in the next 30 days, however, and thus expect the first 2,500 bags form the order by that time with the remaining ones to follow within three months. While I realize this a sizable discount on your normal prices, I’m sure that you are aware of the types of clients we entertain –and the potential for significant profits if you can interest those clients in making further purchases.

I look forward to working with you on this and future orders. I’m sure this will be the beginning of a wonderful relationship between our two companies.

Yours truly, Ronald Graves

Purchasing Director

Snack Snobs, Inc.

For Fine Dining Between Meals

Roberts Chips CM Income Statement (Garlic & Pepper Line) For the Quarter Ending 9/31/2016
Ounces Sold		2,000,000
Sales Revenue		$1,100,000
Variable Costs
Direct Materials	$460,000
Direct Labor	$110,000
Variable Manufacturing Overhead	$85,000
Variable Selling & Administrative Expenses	$110,000
Total Variable Costs		$765,000
Contribution Margin		$335,000
Fixed Costs
Manufacturing Costs	$140,000
S&A Costs	$45,000
Total Fixed Costs		$185,000
Operating Income		$150,000