Earth Baby Analysis
Earth Baby, Inc. (EBI) is an organization that has created brand recognition from its quality products aimed at health-conscious parents. EBI has been approached by Great Deal, Inc. (GDI) to propose a joint venture. GDI wants to use the company’s superior distribution channels to sell EBI baby food that is manufactured and sold as a GDI product manufactured by EBI. Prior to making a decision on whether or not EBI should accept or deny the proposal from GDI, EBI must consider the results from a cost and strategic analysis that focus on the benefits and disadvantages from accepting or rejecting the proposal, both short-term and long-term. After careful assessment of the analysis, EBI will then have a clear view on how the proposal will affect the business and allow the organization to implement the best course of action. EBI’s Chief Financial Officer (CFO), Fred Stanley, has already provided initial calculations to assist in the decision-making process. The CFO has calculated a full cost of three dollars per jar of baby food for EBI to manufacture and distribute its own products. However, one dollar is calculated as irrelevant fixed overhead. The variable costs total two dollars per jar of baby food which are thee costs that EBI would be responsible for if it accepts the proposal from GDI. If the proposal is accepted, GDI will agree to pay EBI three dollars and ten cents per jar of baby food. For each jar of baby food that is manufactured by EBI and distributed by GDI, EBI will see a one dollar and ten cent contribution to income calculated as follows:
Special Order Price – Relevant Costs = Contribution to Income $3.10 - $2.00 = $1.10
However, EBI cannot make a decision based solely on a cost analysis and must further review the proposal from a strategic perspective. The cost analysis is only a short-term viewpoint that does not take into consideration the short-term versus long-term pricing which can ultimately result in denying EBI long-term
Special Order Price – Relevant Costs = Contribution to Income $3.10 - $2.00 = $1.10
However, EBI cannot make a decision based solely on a cost analysis and must further review the proposal from a strategic perspective. The cost analysis is only a short-term viewpoint that does not take into consideration the short-term versus long-term pricing which can ultimately result in denying EBI long-term
References: Blocher, Stout, Juras & Cokins. Cost Management: A Strategic Emphasis. (6th ed.). McGraw Hill, Boston, MA. Grewal, D., Krishnan, R., Baker, J., & Borin, N. (n.d.). The Effect of Store Name, Brand Name and Price Discounts on Consumers’ Evaluations and Purchase Intentions. Retrieved from http://digitalcommons.calpoly.edu/cgi/viewcontent.cgi?article=1010&context=mkt_fac