To Mr. Morrissey: At the beginning, we great appreciate you to trust us to do this research for your business case. After analyzing the background and information you offered to our company, we did a large number of researches in your specific two products and the industry. At present, the quantitative production and demand of the wood stove are shrinking in the market because of the drastic competitive marketing. Otherwise, the marketing of owner is not significant in competition.
Therefore, we are going to focus on wood stove, and offer two assumptions to help you make a decision about your business that you can either discontinue wood stove production and keep production of owner or continue the present production structure. Overview: According to the information we possessed, your company, Bridgewater Casting, Inc. , had been founded in 1938 by your grandfather as a modernization of an older iron forge company. By the early-1970a, it entered into the stove industry and built its only product line to produce wood heating stove.
The product attracted the clients who are the house owner and/or some architectural companies. At last year, you introduced a new product line combined wood stove and baking oven which was targeted at person who might consider brick oven baking with wood. This innovation brought some new customers, but the increasing price may impact their competitive capability on the competitive marketing. Due to the company’s long history in the stove industry, your company has a number of advantages compared to other competitors, such as accumulating experience, customer’s loyalty, and good relationship with sale dealers.
Moreover, the high quality of products and dependability of your company have already gotten the respect from customers. At present, the traditional product, wood heating stove, was plunged into a situation as competition of severity. Under our judgment, the position of Bridgewater Casting is confronting as follow: ? Wood heating stove is the traditional product for Bridgewater Casting; it is in the very severity and shrinking competitive marketing with more than thirty competitors. ?Base on the financial statement, sale of wood heating stove is in the net loss situation. The expanded sales network drove increase in the marketing cost and freight cost. ?The competition of wood oven was minimal. Even its sale figure was fully 80% the number of stoves sold, but its future will be optimistic. Due to our research, we think the Key Success Factor includes: Long experience, High quality product, good dealer sale force, and innovation of product. Evaluation: Quantitative and Qualitative Analysis: 1. First, we compute the number of the units produced and the sale price per unit. Exhibit 1 A. Manufacturing Costs Per UnitB. Manufacturing Total CostsC. Total SalesD.
Number of Units Produced (B/A)E. Sale Price Per Unit (C/D) Ovens$180$3,600,000$7,000,00020,000$350 Stoves$170$4,250,000$7,500,00025,000$300 2. Because of the new product line, it combined the wood stove and baking oven to produce together. We consider averaging the depreciation and rent of two products. In addition, 60% of factory support cost is estimated to ovens, and then we figure out the new manufacturing cost below. Fixed Factory Overhead A. Depreciation (15 year lives): $800,000 B. Rent (10,000 square feet): $550,000 C. Factory Support: $1,170,000 Exhibit 2 Depreciation (A/2)Rent B/2)Factory Support (Oven: C*60% Stove: C*40%)Total Fixed Overhead Ovens$400,000$275,000$702,000$1,377,000 Stoves $400,000$275,000$468,000$1,143,000 3. According to the new Fixed Overhead above, the new Manufacturing Costs is calculated as follow: Ovens: New fixed overhead per unit = $1,377,000 / 20,000 = $ 68. 85 Total cost per unit = $192. 85 Total cost all units = $3,857,000 Stoves: New fixed overhead per unit = $1,143,000 / 25,000 = $ 45. 72 Total cost per unit = $159. 72 Total cost all units = $3,993,000 Exhibit 3 OvensStovesTotal Per Unit$Per Unit$$ Material$45. 00900,000$40. 001,000,0001,900,000
Labor and Benefits ($10/hr)55. 001,100,00050. 001,250,0002,350,000 Variable Overhead24. 00480,00024. 00600,0001,080,000 Fixed Overhead68. 851,377,00045. 721,143,0002,520,000 Total$192. 85$3,857,000$159. 72$3,993,000$7,850,000 4. 20,000 / 25,000: now we calculate the ovens and stoves in the quantities for 20,000 and 25,000 respectively. Exhibit 4 OvensStovesTotal Sale$7,000,000$7,500,000$14,500,000 Cost of Good Sold3,857,0003,993,0007,850,000 Gross Margin3,143,0003,507,0006,650,000 Selling Cost1,500,0001,625,0003,125,000 Shipping Cost1,200,0001,300,0002,500,000 Sales Commissions (5%)350,000375,000725,000
General Expense245,000245,000490,000 Profit Before Tax$(152,000)$(38,000)$(190,000) From the Exhibit 4 we can see that if your company produces the ovens and stoves in the units of 20,000 and 25,000 respectably which will all lose money in the adjusted situation. Because the cost of ovens is raise, the other is fall. Correspondingly, the gross margin is decrease and increase. As the cost of stoves is very high before, even if the cost of good sold is decline by adjusted distribution, the profit still lost. Consequently, we suggest your company do not choose this decision. 5. 0,000 / 15,000: then continue calculating the ovens and stoves in the quantities for 30,000 and 15,000 respectively. Exhibit 5 OvensStovesTotal Sale$10,500,000$4,500,000$15,000,000 Cost of Good Sold5,097,0002,853,0007,950,000 Gross Margin5,403,0001,647,0007,050,000 Selling Cost2,250,000975,0003,125,000 Shipping Cost1,800,000780,0002,775,000 Sales Commissions (5%)525,000225,000750,000 General Expense245,000245,000490,000 Profit Before Tax$583,000$(578,000)$5,000 As produced the quantities for 20,000 and 25,000 in the ovens and stoves were all lost money. Now we try to change the output.
Let ovens are expanded to 30,000 units and stoves are constrained to 15,000 units. From the Exhibit 5 that ovens are earned profit $583,000 after expand. Although stoves still lose more money after decrease the units, your company wins the profit $5000 eventually. Consequently, we recommend your company do the business for producing only one product—oven and produce the units in 30,000. For the stove, we just regret to you to shut down. 6. Only oven: : shows the costs and profits of ovens between the adjusted and unadjusted in 30,000 units. Exhibit 6 Ovens(Adjusted Fixed Overhead)Ovens Sale$10,500,000$10,500,000
Cost of Good Sold5,097,000 5,400,000 Gross Margin5,403,0005,100,000 Selling Cost2,250,0002,250,000 Shipping Cost1,800,0001,800,000 Sales Commissions (5%)525,000525,000 General Expense245,000245,000 Profit Before Tax$583,000$280,000 Our proposal is adopting the adjusted ovens in 30,000 units for your company. By contrast, the sales are identical, but the costs of good sold are difference. The adjusted ovens are lower cost; the other is a little higher. Other costs are no change. We see that the profit of the adjusted ovens is $583,000 and the original one is $280,000 based on the same units.
The first one is earned more profit than the original at $303,000. Therefore, we consider this is a best way to keep the company continue to operation. Recommendation: From the observations of the company recent accounting records, it is recommended that it should exit from the stove business. Because it is proving to incur loss, it is a real threat for the company’s future; this could also affect the flow of oven business. Thus, it is better and more advantageous for the company to discontinue its stove operations and concentrate exclusively on the oven sector.
This also facilitates the company and its employees to focus only core factor, which would enable the management to develop more sales for ovens. Also considering the benefits attached selling ovens over stoves such as higher margin and entirely new concepts would serve as a driving force for the company to sell more. This implies higher selling price causes higher sales commission. Thus it motivates the salesmen to sell more for due to the attractive commission. Hence the company should shut down the stove production and focus excessively on oven production and sales. Implementation:
For the company concentrates on operating oven that the most important key is expanding the oven market. At present, the oven orders are only two units on average, but we seem to be in oven product line now for the foreseeable future, and both seem to be generating positive profit contribution. The company’s purpose is selling 30,000 units annually. Thus, it can earn enough profit and cover the net loss at before. Through the advertising, internet, TV shows and let more and more customers know the product. Also in order to accomplish expansion of marketing, it is a rational to establish relationship with dealers and agencies in new region.