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The company has been in business for many years, and is a “household name”. Their Denver soup plant has a capacity of 120,000 cases/mo, but has been operating at a normal volume of 85,000 cases/mo. Hinds has been approached by Mondo Mart, a large discount retailer, about producing a line of soups under a Mondo Mart house label. Mondo would initially place an order for 15,000 cases/mo, with the understanding that the order will be expanded if the product is successful. The initial order would be for a reduced line of four relatively simple soups, following Hinds’ normal recipes. All of these soups have essentially the same production cost of $31 per case, as follows: ingredients and packaging, $17; direct labor, $3; overhead, $11. The overhead is 55% fixed manufacturing costs, 25% variable manufacturing costs, and 20% allocated general corporate overhead. Hinds would incur $6,000/mo additional setup costs if the order is accepted. Packaging would cost twenty cents/case less because of a cheaper label used by Mondo.
Hinds normally sells these soups for $38/case. Mondo Mart has offered $29/case, arguing that the steep discount is necessary for them to price the product in conformity with their pricing philosophy and customer expectations.
The regional marketing director is inclined to reject the offer, because it is below cost, and therefore Hinds will lose money on the contract. The ultimate decision is up to the regional director of operations. Discuss the factors that the operations director should consider in making the decision.
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