Overhead Fixed Costs I Have Term Paper

Excerpt from Term Paper :

Mod 4 Case

For instance, suppose Sam Smoothtalk thinks about accepting the 300 unit offer at $295 per unit. Suppose the company who makes the offer is willing to sign an agreement to buy 300 units each month. That means that the probability quotient is 1 (the sale is a sure thing). Suppose that Sam thinks that the probability of such an offer being available each month is roughly 50%. If he tells Mr. Pecos about his opinion and Mr. Pecos (after eventually consulting the controller, Mr. Ledger) arrives to the same conclusion), then the probability factor would be 0.5. Therefore, the number of units that might be sold is:

300 (units) X 12 (months) X 0.5 (the probability factor) = 1,800 (units per year)

Add that to the initial estimate (10,000 at the beginning of the year and 11,000 after the first month) and you get 11,800 and 12,800, respectively. Compare the price from the distributor with the one on the page 1 table and you get a criterion for making a financially sound decision.

Since there is no way of estimating the probability factor, I will go with 0.7 (70%) for all salesmen, although that might not be very accurate.

Old Rule (Minimum price = $300)

New estimated number (units*12*0.7+10,000)


(per unit)

Number of Units


Sam Smoothtalk

New minimum price

Offer No. 1

Offer No. 2

Offer No. 3 $295-300 No 12,520 $291 Yes Harry Hustler

Offer No. 1

Offer No. 2

Offer No. 3

Offer No. 4

Gary Giftofgab

Offer No. 1

Offer No. 2

Offer No. 3

The offer made to Ms. Goodperson was not included since Ms. Goodperson is not a salesperson, so the probability factor is 0 or almost 0.

4) as for recommendations for Mr. Pecos, I would advise rewarding the salesmen for their effort by giving them something more than a fixed
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salary. As for his decision to fire Ms. Goodperson, perhaps it would have been wiser to transfer her to the sales department. If any losses were incurred as a result of Ms. Goodperson's decision, I would advise Mr. Pecos to sue her for damages.


The company I chose is Kmart

Kmart Corporation is a mass merchandising company that serves America through its 1,504 Kmart and Kmart Super Center retail outlets in 49 states, Puerto Rico and the Virgin Islands. There are approximately 144,000 Kmart associates, including 2,400 associates at Kmart's headquarters in Troy, Michigan.

Pharmacy services are available in 1,152 Kmart stores. Food Service: 307 Kmart stores offer full Little Caesar's Pizza Stations and 863 locations offer Little Caesar's as a part of its menu for a total of 1,070 stores with a food service presence. (www.kmart.com) couldn't find any relevant material regarding Kmart's costs that I could use to solve this exercise, so I came with some data of my own that could very well apply to Kmart.

Suppose one Kmart store decides to buy 100 Adidas sports shoes, the cost being $100 dollars a pair. Suppose the same store manager could buy with the $10,000 allocated for the Adidas sports shoes similar gear from Nike, but at a higher price, so only 90 pairs can actually be bought (i.e. $111 a pair). Now suppose that the market would have a similar demand for both types of shoes. Therefore, a similar price would have to be charged for both producers ($150, for the sake of this exercise). Let's assume that the store had a previous contract with Nike according to which Nike is obliged to bring several promotional products, should the store decide, at any time, to buy from Nike a quantity of sports shoes. The store paid $1,000 for these promotional products.

As a consequence, if the manager decides to buy from Adidas (100 pairs), the total cost is 10,000 while the revenues reach 15,000. If he/she decides to buy from Nike (100 pairs),…

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