Elizabeth Lee is a top seller on eBay®. In fact, her business has grown so large that she can no longer manage her items on eBay's website and ship her products to the auction winners in a timely manner. When she first started, she had to ship only a few items each week. To save on the shipping charges, she would purchase the shipping materials (boxes, tape, cushioning, and labels), pack the items, and take them to the post office herself. Now she has several items to ship every day, and she doesn't have time to do it all. Once or twice, Elizabeth has used the local Mail Plus store. Sometimes she will ask them to prepare and ship a package; other times, she will purchase the materials, wrap the package herself, and send it from Mail Plus. The store's prices are high, but the employees aren't incredibly busy, and they do a great job. Elizabeth has approached the owner, Roger Lippert, to see if he is interested in working out an arrangement in which she would receive a 20% discount on custom packaging. She knows she can't get a discount on the actual shipping charge-Mail Plus uses the U.S. Postal Service.
Roger has expressed interest in the idea but is having difficulty determining whether he will make any money on the deal without knowing the specific items Elizabeth would want to ship. Following is an income statement for the custom packaging portion of his business:
Revenues (1,200 custom packages) .... $18,000
Cartons ............... (6,000)
Cushioning ............. (600)
Tape, labels............. (1,500)
Salaried Labor ............ (4,000)
Overhead ............... (4,100)
Income................ $ 1,800
Roger’s pricing system is simple: He multiplies the cost of the carton required for the job by three. The larger the carton, he reasons, the longer it takes to pack, and the more materials it requires. He feels he has done quite well with this pricing system. If he gives Elizabeth a 20% discount, he thinks he will lose money.
a. Based on the information given, would Roger make money on Elizabeth’s offer?
b. What does Roger need to consider besides the income he would receive from Elizabeth?
c. What does Elizabeth need to consider before entering into a deal with Roger?