Question

Centre Island Kayaks has been manufacturing a premium line of sea kayaks for the past 12 years. These kayaks are marketed throughout North America in specialty stores and are among the highest quality and highest priced kayaks on the market. About 85% of the company’s sales are in the United States, the remainder in Canada. The company is proud of its kayaks, which frequently win awards for its design. The company makes one model which it sells to the specialty stores at a price of $1,890. The average selling price of the kayak is $2,900.

Unfortunately, because of the weak growth of the sport, the market for the high-end kayak has been declining for several years. Kayaks tend to last a long time and the high end market is saturated. As a consequence, annual demand for Centre Island Kayaks has peaked at 740 units and is forecast to remain at that level over the next three years. The company has not anticipated the flat growth in demand and recently expanded its facilities. It now has the capacity to produce 1,100 kayaks annually. The company’s income statement for the previous year, in which it sold 740 kayaks is set out below:

INCOME STATEMENT

$

Revenue

1,398,600

Material

160,000

Labour

320,000

Fixed overhead

350,000

Variable overhead

60,000

Cost of goods sold

890,000

Marketing

260,000

Commissions

139,860

Administration

135,000

Total expenses

534,860

Loss

(26,260)

Mountain Co-op is a Canadian cooperative retail chain with stores in several Canadian cities. It has recently approached Centre Island Kayaks and requested that the company prepare a “private label” its kayak for sale by Mountain Coop. The retailer has offered a long-term contract to purchase 300 kayaks annually for the next years at a price of $1,100 per kayak. It is not willing to pay a higher price because it plans to sell the kayak at a retail price of only $1,695. Because this sale would involve a private label for an existing model, the company would have no development costs for this order. Furthermore, it would not have to pay its regular commission rate of 10% as the order was not brought in by the sales force.

The president of Centre Island Kayaks is interested in the Mountain Co-op offer even though the price is well below Centre Island’s normal price. The president’s one concern is that the company may see a decline in sales with existing retailers, in that some customers will comparison shop and find the same-quality kayak available at a lower price in Mountain Co-op stores. The president has engaged you, a well respected business consultant, for help in deciding what to do.

Answer 1

Central Island Kayaks
Income Statement
	With Special	Without Special	Deff. Cost
	order	Order
Sales Revenues
$1,398,600 + (300 x $1,100)	$     1,728,600	$1,398, 600	$       330,000
Less: Variaable Cost:'
Direct Mareial	$       224,865	$      160,000	$         64,865
Direct Labor	$       449,730	$      320,000	$       129,730
Variable Overhead	$         84,324	$        60,000	$         24,324
Sales Commision	$       139,860	$      139,860	$               -
Contribution Margin
Less: Fixed Cost:
Fixed Overhead	$       350,000	$      350,000	$               -
Administration	$       135,000	$      135,000	$               -
Marketing	$       260,000	$      260,000	$               -
Net Income(Loss)	$         84,821	$      (26,260)	$       111,081
	Accepting	Rejecting
	Order	order	Differential
Revenue	$     1,728,600	$   1,398,600	$       330,000
Costs	$     1,643,779	$   1,424,860	$       218,919
Net Benefits for accepting order	$         84,821	$      (26,260)	$     111,081
Decision:
The special order should be accepted as there is net benefits of $111,081 on account of differential
revenue and cost. The increase in differential revenue is more than the differential cost and this
leads recover the net loss and providing overall profits of $84,821 for the company as there is a
flat growth in sales.
However, this product is sold in Canadian Market under a different private level.where it has
15% sales percentage of its total sales and it is selling the product at $1,890. The product
sold under private level for $1,695 is cheaper by $195. This will lead to tough competition
and may reduce the share in sales there. As the company is very famous and known for
it quality may not lose the entire sales share of $209,790 (15%) and incremental
sales revenue is $330,000 relatively higher than the present share.
The company can also reduce its price by $195 in Canadian market to compete and increase
the sales volume as there is demand for kayaks over there and there will no adverse effects in main market where it is selling 85% share of its product.