CU, Inc., developed a promotional program for a local shopping center a few years ago. Having invested $360,000 in developing the original promotion campaign, the firm is ready to present its client with an add-on contract offer that includes the original promotion areas of (1) a TV advertising campaign, (2) a series of brochures for mass mailing, and (3) a special rotating BIG SALE schedule for 10 of the 28 tenants in the shopping center. The revenue terms from the original contract with the shopping center and the offer for the add-on contract, which extends the original contract terms, follow.

CU estimates that the following additional costs will be incurred by extending the contract:

Required

1. Compute the costs that will be incurred for each part of the add-on portion of the contract.

2. Should CU offer the add-on contract, or should it ask for a final settlement check based on the original contract only? Defend your answer.

3. If management of the shopping center indicates that the terms of the add-on contract are negotiable, how should CUrespond?

TV Campaign $30,000 22,000 12,000 BIG SALE Brochures Schedule Direct labor Variable overhead costs Fixed overhead costs 9,000 14,000 4,000 $7,000 6,000 2,000