Reference no: EM131272115
Yorktown Industrial Supply Company (YIS) manufactures and sells electrical components used primarily by recreational vehicle manufacturers. Typically Yorktown has multiyear supply agreements with its major customers. One of those customers, Blue Sky RV (BSRV), is near the end of the first year of a threeyear contract that calls for Blue Sky to buy at least 1,000 sets of electronic component packages for its recreational vehicles from YIS at a price of $1,200 per unit in year one and $1,225 in year two and $1,250 in year three.
At the end of the first year of the contract, Blue Sky's purchasing department determined that it can buy the same quality of electrical components from another supplier in the two remaining years of its contract with YIS at a price of $1,100 per set of electrical components. BSRV has informed YIS that either it has to match the price of the alternate supplier or it will buy the products from the other company.
The YIS response was that BSRV signed a three year legally binding contract that has two more years left on the contract and that YIS expects them to honor the agreement. Blue Sky management decided to walk away from the contract and to start buying electrical components from the new supplier. Yorktown Industrial Supply filed suit seeking unspecified damages from BSRV for breach of contract. Below are some additional facts and data:
YIS manufacturing, marketing, and shipping information:
Direct materials costs = $530 per unit
Direct labor costs = $140 per unit
Manufacturing overhead = $250 per unit (80% fixed cost)
Sales costs = $100 per unit (90% variable)
Shipping costs = $50 per unit (80% variable)
Even with the BSRV contract YIS is operating about 20 percent below its normal capacity
Blue Sky Recreational Vehicles response to the YIS lawsuit claimed that not only was the price of the electrical components packages cheaper from the new supplier, but they were of higher quality. Further BSRV in its pleadings to the court filed a claim asking the court for "relief from YIS's overcharging BSRV for electrical components by $100 per unit during the first year of the contract".
During year one of the contract between YIS and BSRV what was YIS's profit from the contract and what was its contribution margin the contract?
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