The Cloud Burst Sprinkler Company of Benicia, California has been manufacturing and selling a water efficient sprinkler exclusively to Home Depot for the last two years. Although there is not a binding contract that gives Home Depot exclusive rights to buy and stock the sprinkler in their network of locations, Cloud Burst has placed a great deal of importance on keeping Home Depot locations across the country and Canada fully stocked with their water efficient sprinkler. ACE Hardware has approached Cloudburst indicating they would like to stock the water efficient sprinkler in their 4,192 stores across the United States. The initial proposal submitted by ACE is to purchase 50,304 sprinklers which will result in a dozen sprinklers stocked in every store. The proposal received from ACE will NOT affect fixed costs, however, ACE has requested a special onetime quantity wholesale discount price of $5.80 per sprinkler For the first 6 months of 2022, Cloud Burst Sprinkler Company achieved the following results operating at 63% capacity and selling 122,400 sprinklers exclusively to Home Depot: Sales to Home Depot $826,200 Cost of Goods Sold 532,440 Gross Profit 293,760 Operating Expenses: Variable Portion 24,480 Fixed Portion 115,000 Net Income $154,280 Cost of goods sold is 100% variable; operating expenses are 20% variable and 80% fixed. Instructions: (a) Prepare an incremental analysis for the ACE Hardware proposal. (b) Should Cloud Burst Sprinkler Company accept the ACE Hardware proposal? (c) What “Qualitative” Factors should the Cloud Burst Sprinkler Company think about and consider in making a decision to accept the ACE Hardware proposal?
The Cloud Burst Sprinkler Company of Benicia, California has been manufacturing and selling a water efficient sprinkler exclusively to Home Depot for the last two years. Although there is not a binding contract that gives Home Depot exclusive rights to buy and stock the sprinkler in their network of locations, Cloud Burst has placed a great deal of importance on keeping Home Depot locations across the country and Canada fully stocked with their water efficient sprinkler. ACE Hardware has approached Cloudburst indicating they would like to stock the water efficient sprinkler in their 4,192 stores across the United States. The initial proposal submitted by ACE is to purchase 50,304 sprinklers which will result in a dozen sprinklers stocked in every store. The proposal received from ACE will NOT affect fixed costs, however, ACE has requested a special onetime quantity wholesale discount price of $5.80 per sprinkler For the first 6 months of 2022, Cloud Burst Sprinkler Company achieved the following results operating at 63% capacity and selling 122,400 sprinklers exclusively to Home Depot: Sales to Home Depot $826,200 Cost of Goods Sold 532,440 Gross Profit 293,760 Operating Expenses: Variable Portion 24,480 Fixed Portion 115,000 Net Income $154,280 Cost of goods sold is 100% variable; operating expenses are 20% variable and 80% fixed. Instructions: (a) Prepare an incremental analysis for the ACE Hardware proposal. (b) Should Cloud Burst Sprinkler Company accept the ACE Hardware proposal? (c) What “Qualitative” Factors should the Cloud Burst Sprinkler Company think about and consider in making a decision to accept the ACE Hardware proposal?
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