Accepting the foreign retailer’s offer to purchase 25,000 teddy bears at $4.00 each raises some significant concerns related to profitability and viability.
Currently, Gund Manufacturing sells its teddy bears for $6.50 each. If we break down the numbers:
- Sale price per teddy bear: $6.50
- Offer price from foreign retailer: $4.00
- Quantity offered: 25,000 teddy bears
When we look at the potential revenue from the foreign retailer:
- Revenue from the sale to the retailer: 25,000 x $4.00 = $100,000
On the other hand, if the teddy bears are currently being sold for $6.50, they are likely producing at a cost that should ideally be lower than this selling price to ensure profitability. For example, if the manufacturing cost per teddy bear is higher than $4.00, accepting this offer would lead to a loss on each unit sold:
- Loss per teddy bear if manufacturing cost is $X: $X – $4.00
- Total loss from the order: 25,000 x (X – 4.00)
This raises a few crucial questions for Gund Manufacturing:
- What is the current average manufacturing cost per teddy bear?
- If the manufacturing cost is above $4.00, can the company afford to sell at a loss?
- Would producing these teddy bears at a lower margin affect their overall business model?
In conclusion, while the offer from the foreign retailer might seem attractive due to a high volume sale, Gund Manufacturing needs to carefully assess its manufacturing costs and overall financial health before making a decision. Accepting any deal that undermines profitability could lead to more significant issues in the business environment.