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 hows my little boy doing?

Percy smiled and shook his head. If he lived to be 100 years old, hed still be a little boy to his mom. Im doing fine, too. Work is good; really busy, but I cant complain. I have a good staff now to help with a lot of the work.

Thats 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 Im not going to like very much. Percy leaned back and crossed his arms. Now, tell me whats up.

Janet chuckled. I never could put one over on you, not even when you really were my little boy. Well, here goes then. Ive been contacted by Snack Snobs. Its a very large chain in the South, and they would very much like to stock our new line of Garlic & Pepper in their stores. Were 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 whats 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. Thats your job as Roberts' 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. Theyre asking for a huge discount. We only sell the 12 oz. bags for $7.00 right now anyway.

I know. Thats why I brought you in on the decision. You know that Im 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 dont know, Mom. Im not sure I even need to run the numbers. This is a very low offer. I dont 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? Wouldnt they just pick up a new batch every time they go to the shops?

Janet waived her hand dismissively. Of course not. These people arent cost conscious with anything under a $100. They wont care. Well market directly to them and make a bundle on selling them large bags for their large parties. I think its 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. Ill tell you what, Mom. Lets enjoy lunch, then Ill take these back to the office and run some calculations and scenarios. Ill 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. ------------------------------------------------------------------------------------------------------------------------------------------

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, weve been offered a special order contract and we need to decide if we should accept the offer or not. Heres 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 havent 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, Im not sure. Why dont you run the numbers both ways, then well 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. Ill 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.

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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 Roberts should accept the special order? Explain your answer.