THE COSTING OF FUNCTIONAL SANDALS

The costs of a pair of Functional sandals consisted of materials, labour and overhead.

Material costs included:

outsoles:

$$2\mathrm{.}50$ per pair

insoles:

$4\mathrm{.}00$ per pair

leather:

$4\mathrm{.}00$ per pair

packaging: $,1\mathrm{.}00$ per pair

labour cost: $$6\mathrm{.}00$ per pair, based on time studies.

overhead costs: $,$$$5\mathrm{.}00$ per pair, calculated as follows: overhead $($fixed$)$ costs of $$30,000$ per year

divided by the current production level of $6,000$ pairs per year.

Although only $6,000$ pairs of Functionals were currently being manufactured annually $($about $500$ pairs per

month$),$ production of $26,000$ pairs per year $($over $2,000$ pairs per month$)$ could be accommodated by the

plant.

Rick estimated that if production were increased to the level required by The Bay contract, the costs of

gearing up production capacity to the higher level would be about $$0\mathrm{.}80$ per pair produced to cover

additional labour costs.

THE DECISION FACING RICK

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

plant was underutilized. However, he was not sure whether the contract with The Bay was the best way to

do this. He was extremely reluctant to lower his wholesale price, since he was already undercutting his

major competitor by $20\%.$