New Life Inc Manufactures Skin Creams Soaps and Other Produ [PDF]

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Solved: New Life Inc manufactures skin creams soaps and other produ



New Life, Inc., manufactures skin creams, soaps, and other products primarily for people with dry and sensitive skin. It has just introduced a new line of product that removes the spotting and wrinkling in skin associated with aging. It sells these products in pharmacies and department stores at prices somewhat higher than those of other brands because of New Life's excellent reputation for quality and effectiveness. New Life currently has very low utilization of plant capacity. Two years ago, in anticipation of rapid growth, the company opened a large new manufacturing plant, which has yet to be utilized more than 50 percent. Partly for this reason, New Life has sought new partners and was able, with the help of financial analysts, to locate suitable business partners. The first potential partner identified in this search was a large supermarket chain, SuperValue, which is interested in the partnership because it wants New Life to manufacture an age cream to sell in its stores. The product would be essentially the same as the New Life product but packaged with the SuperValue brand name. The agreement would pay New Life $2.00 per unit and would allow SuperValue a limited right to advertise the product as manufactured for SuperValue by New Life. New Life's CFO has made some calculations and has determined that the direct materials, direct labor, and other variable costs needed for the SuperValue order would be about $1.00 per unit as compared to the full cost of $2.50 (materials, labor, and overhead) for the equivalent New Life product. Required Should New Life accept the proposal from SuperValue? Why or why not?



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