1. Using the costing information in Table MA.1, assess the impact of agreeing to a contract to manufacture a supermarkets own-label shampoo. The operations director confirms that the contract would be for 500,000 bottles and be sold at a 20% discount on current selling prices. Direct costs would be the same, but there would be a bulk delivery charge of 85,000. What other factors should be taken into account?

Table MA.1 Current product data Volume Selling Direct Distribution Bottles Bottles (000 price costs cost per per per bottles) per per bottle machine labour bottle bottle hour hour Shampoo 2,000 1.50 0.60 0.20 2,600 14,000 Conditioner 1,500 1.75 0.50 0.20 3,100 6,700 Liquid soap 500 1.25 0.40 0.30 2,010 1,500 Note: Assume direct costs and distribution are 100% variable. The majority of direct costs are materials with a small proportion of direct labour