Smooth, Inc

Essay

Smooth, Inc. manufactures bath and beauty products such as soaps, skin creams, lotions, 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 slightly higher than those of other brands because of Smooth's excellent reputation for quality and effectiveness.
Smooth currently has very low utilization of plant capacity. Two years ago, in anticipation of rapid growth, the company opened a new large manufacturing plant, which has yet to be utilized more than 50 percent. Partly for this reason, Smooth 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, Price-Mart, which is interested in the partnership because it wants Smooth to manufacture an age cream to sell in its stores. The product would be essentially the same as the Smooth product but would be packaged in the Price-Mart brand name. The agreement would pay Smooth $2.00 per unit and would allow Price-Mart a limited right to advertise the product as manufactured for Price-Mart by Smooth. Smooth's CFO has made some calculations and has determined that the direct materials, direct labor, and other variable costs needed for the Price-Mart order would be about $1.00 per unit as compared to the full cost of $2.50 (materials, labor, and overhead) for the equivalent Smooth product.
Required:
Should Smooth Inc. accept the proposal from Price-Mart? Why or why not? (Include strategic considerations)