Incremental Analysis for ACE Hardware Proposal

Particulars

Amount

Incremental Revenue

Sales to ACE $(50,304$ units at $$5\mathrm{.}80)$

$$291,763\mathrm{.}20$

Incremental Costs

Cost of Goods Sold $(100\%$ Variable$)$

$$291,763\mathrm{.}20(50,304$ x $$5\mathrm{.}80)$

Variable Operating Expenses

$$10,065\mathrm{.}60(50,304$ x $$0\mathrm{.}20)$

Incremental Net Income $($Loss$)$

$-$$$10,065\mathrm{.}60$

Explanation:

The incremental analysis shows the additional revenue and costs that Cloud Burst would incur by accepting ACE Hardware$$s proposal. ACE has offered to buy $50,304$ sprinklers at a discounted price of $$5\mathrm{.}80$ per unit, resulting in additional revenue of $$291,763\mathrm{.}20.$ However, since the cost of goods sold is fully variable, the production cost for these sprinklers also totals $$291,763\mathrm{.}20,$ leaving no gross profit. The variable operating expenses increase by $$10,065\mathrm{.}60($at $$0\mathrm{.}20$ per unit$),$ leading to an incremental net income $($loss$)$ of $-$$$10,065\mathrm{.}60.$ This negative result indicates that Cloud Burst would incur a small loss if they accept ACE's current terms.

Step $2$

Recommendation Based on Incremental Analysis

Since the incremental net income for this one$-$time order is negative $(-$$$10,065\mathrm{.}60),$ Cloud Burst Sprinkler would experience a slight loss by accepting ACE$$s proposal at the requested price of $$5\mathrm{.}80$ per unit.

Explanation:

From the financial analysis if extends the acceptance of the proposal at the requested wholesale price of $$5\mathrm{.}80$ per unit will lead to loss of $$10,065\mathrm{.}60$ in the short run. This is mainly because of the requested rate by ACE which does not accord adequate cover for the other variable cost and operating expenses. But if Cloud Burst is only looking at profit in the short term, then they may well decide to turn the proposal down. However, this assessment should be accompanied with other wedge strategic factors in case of ACE being a strategic market.

Step $3$

Qualitative Factors to Consider

Qualitative Factors

Consideration

Existing Relationship with Home Depot

Will supplying ACE affect the strategic importance and future orders from Home Depot?

Market Exposure and Expansion

Could ACE$$s national presence and the possibility of long$-$term partnership increase Cloud Burst$$s market reach and visibility?

Potential for Follow$-$Up Orders

Is there potential for ACE to increase future orders at standard or higher pricing levels?

Impact on Brand Image and Exclusivity

Will expanding to ACE and ending exclusivity with Home Depot impact brand perception or product value? Plz solve ASAP