Sell or Process-Further Decision
P 10. Marketeers, Inc., developed a promotional program for a large shopping center in Sunset Living, Arizona, 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. Presented below are 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.
|
Original Contract Terms |
Extended Contract Including Add-On Terms |
|
|
TV advertising campaign |
$520,000 |
$ 580,000 |
|
Brochure series |
210,000 |
230,000 |
|
Rotating BIG SALE schedule |
170,000 |
190,000 |
|
Totals |
$900,000 |
$1,000,000 |
Marketeers, Inc., estimates that the following additional costs will be incurred by extending the contract:
|
TV Campaign |
Brochures |
BIG SALE Schedule |
|
|
Direct labor |
$30,000 |
$ 9,000 |
$7,000 |
|
Variable overhead costs |
22,000 |
14,000 |
6,000 |
|
Fixed overhead costs* |
12,000 |
4,000 |
2,000 |
Required
1. Compute the costs that will be incurred for each part of the add-on portion of the contract.
2. Should Marketeers, Inc., 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 Marketeers, Inc., respond?