Reference no: EM132507944

Point 1: Hunter Industries, Inc. is a manufacturer of soup and condiment products under its own standard and premium labels. 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 95,000 cases/mo. Hunter has been approached by Dino Mart, a large discount retailer, about producing a line of soups under a Dino Mart house label. Dino would initially place an order for 16,000 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 six relatively simple soups. The soups would be made following Hunter's recipes, except that some cheaper ingredients would be used, reducing cost by $1.50/case. All of these soups have essentially the same production cost of $26 per case, as follows: ingredients and packaging, $14; direct labor, $2; overhead, $10. The overhead is 65% fixed manufacturing costs, 10% variable manufacturing costs, and 25% allocated general corporate overhead. Hunter would incur $5,000/mo additional setup costs if the order is accepted. Packaging would cost ten cents/case less because of a cheaper label used by Dino.

Point 2: Hunter normally sells these soups for $34/case. Dino Mart has offered $20/case, arguing that the steep discount is necessary for them to price the product in conformity with their pricing philosophy and customer expectations.

Point 3: The regional marketing director is inclined to reject the offer, because it is below cost, and therefore Hunter will lose money on the contract. The ultimate decision is up to the regional director of operations.

Required:

Question 1: Discuss the factors that the operations director should consider in making the decision.