St Pierre is a Canadian company that cans certain food products such as tuna. With a worldwide overcapacity in the food-canning market, pricing is very competitive. Although St Pierre sells its tuna under a brand name, it has been approached by a large European supermarket to supply tuna under their own label. Current costs per 1,000 cans are shown in Table 13.5.

St Pierre would have to invest C\($200,000\) in a new labelling machine to meet the specific requirements of the supermarket. Production overheads are absorbed on machine hours and are not variable. All other costs vary with volume. The supermarket has offered a contract for 500,000 cans at a price of C\($0.70\) per can for the next six months but would consider increasing it to one million cans if the price reduced to C\($0.63\) per can. Delivery would be in bulk and cost C\($35,000\) for 500,000 cans and C\($50,000\) for one million cans. Future sales are likely to be one million cans per annum, but these are not guaranteed until the first contract has been completed. Advise St Pierre on its decision.

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Table 13.5 Tuna St Pierre tuna Additional materials Can Label Direct labour Production overheads C$ 180 20 15 5 105 85