Pete's Pet Products is a sole proprietorship owned by Pete Thompson. The store provides a full-line of pet products, including food, grooming materials, toys, leashes, etc. The company also sells hand-made pet houses, including dog houses, bird cages, and cat castles. Each of the pet houses is being evaluated in terms of cost-volume-profit. See the relevant information below:
|
Dog house |
Bird cage |
Cat castle |
| Sales Price |
$140 |
$95 |
$160 |
| Variable cost |
$65 |
$34 |
$56 |
| Fixed monthly cost |
30% |
25% |
45% |
When Pete uses a distributor to sell additional pet houses, he has to pay a sales commission of 8% of the sales price. On average, he sells 60% of each pet house through distributors. The fixed costs (shown above) are based on estimated design time for each product. Pete's store averages $32,000 of fixed costs per month.
Based on the info, please answer the following question:
Pete was recently asked to submit a bid for a new customer who is interested in purchasing 450 dog houses, 250 bird cages, and 550 cat castles to stock his newly opened store in another state. What factors would impact Pete's bid to the new customer? What happens if a competitor's bid comes in lower than what Pete can offer? Would you recommend Pete drop the selling price rather than lose the opportunity? Why or why not? Explain how much he can afford to drop the price.