CompuBright manufactures a product called the BlueBerry 200. This the firm’s mai
ID: 2808558 • Letter: C
Question
CompuBright manufactures a product called the BlueBerry 200. This the firm’s main product and accounts for a significant portion of profits. Last week, CompuBright was approached by LowValue, an online retailer, who offered to purchase a private label version of the BlueBerry 200. This product would be called the StrawBerry. It would have most of the same functions as the BlueBerry 200 in addition to some minor cosmetic differences.
The LowValue offer had a number of issues that gave the president some concern. These included:
· Lower price than the BlueBerry 200
· Significant volume (27% of manufacturing capacity)
· Small cost for one-time design and setup
· Significant investment in inventory is required
· LowValue takes longer than average to pay vendors
· Accepting the order would exceed manufacturing capacity, but LowValue has indicated it is an all or nothing deal
Information about these issues and other data are provided below. The president has asked you to provide a recommendation on the LowValue offer.
Required:
1. Calculate the incremental profit from accepting the LowValue offer.
2. Calculate the investment in working capital.
3. Calculate a simple ROI for the deal.
Cost Structure Bluberry 200
Per unit costs
Direct materials - $8
Direct Labor - $4.50
Fixed Manufacturing OH- $8
Full Manufacturing costs of blueberry200 is $20.50
The LowValue offer
Quantity (annual sales) 35,000 Price $17 One-time design and setup cost- $2,800
Cost Structure Starwberry
Direct marerials / unit costs- $7.50 Direct Labor/ unit costs- $4.00
Low value requires quick access to inventory and takes longer than normal to pay vendors
Incremental FG inventory (# units) - 10,000
Collection period (# days) - 60
Income tax rate- 30%
Explanation / Answer
Calculation of incremental profit:
Alternative -1 Altemative -2
variable cost:
Cost to buy from law value 17
Direct material 8 0
Direct Labour 4.50 0
Manufacturing overhead 8 0
Total Cost 20.50 17
Incremental Profit (20.50-17)= 3.50 per unit
Total incremental profit = 35000*3.50=122500
2.
investment in working capital
sales=35000*17=595000
collection period =60 days
595000*60*/365=97808
Investment in wc= Debtor +stock
97808+10000*7.5
=172808
3.
simple ROI =Gains-Investment/investment
=incremental Gains=35000 *3.5=122500
Tax 30%=36750
gain = 122500-36750=85750
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