Guillermo_Furniture_Store_Decisions

The Guillermo Furniture Store Decisions Team A Accounting/ACC 561 November 10, 2010 Professor Rios, Angel J. Guillermo Furniture Store Decisions Navallez Guillermo’s quest to remain competitive in the furniture industry comes down to analyzing cost accounting measures. By carefully analyzing balance sheets and income statements, accounting officials can provide management a synopsis of where company strengths and weaknesses are, and then corrective measures can be adjusted to improve company performance. A break even analysis, return on investment, and residual income will be calculated as well as many other issues will be discussed to allow Guillermo to make the best informed decision for his company. In this report, Team A examines the components that make up a cost control system and explains how management uses this information in their decision-making process. Guillermo Furniture Store can use the following three systems to help achieve the store’s organizational goal. The Quality Control System is in the manufacturing business. Quality is the number one priority concerning customer satisfaction. Thereby the quality control system is required to satisfy the customer’s needs and trends. Quality control is a system of routine technical activities, to measure and control the quality of the inventory as it is being developed (Quality Assurance and Quality Control, 2010). Once ensured that customers are satisfied with their high quality, Guillermo Furniture can consider expanding business abroad. A management control system is a process designed to verify the status of the advancement of planned objectives and the efficacy and efficiency of the organization through analysis of resources, costs, and proceeds (Fundamentals of Management Control, 2010). Guillermo Furniture has to take an advanced approach to the market instead of responding to changes in the market. With a slanted and defensive attitude, a company cannot survive in the competitive furniture business. Simply stated, a good offense is the best defense. Through the process of a management control system, Guillermo can discover its strengths and weaknesses. Based on their findings, management can develop a new strategy along with new marketing techniques and financial systems. Strong marketing techniques and financial systems are fundamental for sound business management. Technology control system is another system that can be analyzed. A new foreign company competitor has emerged with cheap labor and a high-tech approach. Guillermo’s business so far was good with relatively inexpensive labor and first class handcrafted products (UoPX, 2010). However, the business environment has changed. Guillermo has to invest in research and development and implement a high technology control system. If successful with this system, Guillermo will increase the number of patents and this will firm up its status of the furniture business. Even using the three systems described above, Guillermo still has to evaluate cost relationships and behaviors. In 2009, the firm’s worth is $1.3 million (University of Phoenix, 2010). On the horizon, competitors forecasted Sonora, Mexico has the growth potential to increase their profits and reduce earnings of established companies. Smaller companies like Guillermo are therefore forced to remain competitive by reducing cost in direct relation to their cost drivers. The stores cost drivers are direct and indirect through production, distribution, and customer service. The relationship these cost drivers have on the stores accounting systems is that cost drivers provide relevant information that accountants require for their balance sheets and income statements. As a result, “some cost relationships by nature are not directly observable,” so the store account must be confident the information provide to Guillermo is financially sound (Horngren, 2008, p. 101). A confident accountant is Guillermo’s best advisor. To continue growing, the company must continue to examine ways to reduce their fixed and variable cost. Attempting to reduce fixed cost could hamper operations because fixed cost normally does not change, but the company’s variable cost expenditures on such items as materials, supplies, and fuel are adjustable, and therefore provides additional savings once alternative solutions are brought forth. The stores variable and fixed costs are important in understanding the cost relationship value because together they help the store’s owner measure, improve, and evaluate company performance. Understanding the distinction between variable and fixed cost is to remain ethically sound and should always be considered in every business decision. In decision-making processes, Guillermo relies on internal and external resources to provide the most up-to-date information. This information is identified through resource and control planning models used to simplify cost analysis and keep the company focus on goals and objectives. Accounting control systems as a way to guide manager’s decision-making process. The control systems incorporate tested formulas and sound practices refined over the years by those financially wealthy. Guillermo must reduce cost to remain competitive and profitable. Further evaluation between cost and their drivers will help forecast the firm’s future and continue the stores quest as a profitable family-owned business. Another option that Guillermo analyzed is selling the flame retardant separately. All options have to be considered. Guillermo has patented a process for that makes a coating for his company's furniture (University of Phoenix, 2010). According to University of Phoenix (2010), "Through production, the process first created a common flame-retardant; then, upon further processing, the coating became complete and stain resistant. There was a market for the flame retardant, but not as much of a market for the finished coating" (p. 1). The following graph and data will provide a detailed analysis of the possible effects of selling the flame-retardant separately. [pic] According to Horngren, Sundem, Stratton, Burgstahler, and Schatzberg (2008), "The break-even point is the level of sales at which revenue equals expenses and net income is zero" (p. 54). The break-even point can be listed in two ways. It can be listed through the volume needed to be sold in units or sales in dollars. Broken down in the simplest form, the equation for break-even volume in units is equal to the fixed expenses divided by the unit contribution margin (Horngren, Sundem, Stratton, et al., 2008). The equation for break-even volume of sales in dollars is equal to the fixed expenses divided by the contribution-margin ratio (Horngren, Sundem, Stratton, et al., 2008). To find the unit contribution margin, subtract the variable cost per unit from the unit sales price (Horngren, Sundem, Stratton, et al., 2008). The contribution-margin ratio is calculated as 100% minus the variable cost percentage (Horngren, Sundem, Stratton, et al., 2008). According to Guillermo's budget, both the variable and selling price of the flame-retardant is $10 (University of Phoenix, 2010). It is highly unlikely that Guillermo intends to sell the flame-retardant for the price of the materials cost. The team will assume there is an error in the variable cost because there is data missing in the Chem C column. The team will define the variable cost per liter for purposes of this paper as $9. Fixed expenses = $224,790 Selling price per liter = $10 Variable cost = $9 Unit contribution margin = 1 Contribution-margin percentage = 10% The break-even volume in units is 224,700 liters. The break-even volume in dollars is $2,224,700. If the flame-retardant were to be sold separately, the break-even volume of 224,700 liters far surpasses the plants current production capacity of 186 liters per year (University of Phoenix, 2010). Even if the demand from the public was huge that they were guaranteed, they could sell enough units, they simply cannot produce enough of the product. Any changes in current production techniques will most likely not fill in the gap of the additional units needed, therefore, it would not make for a good business decision to discontinue all other products and focus on producing and selling the flame-retardant. That idea will not prevent Guillermo from losing money. More analysis had to be accomplished. Further analysis of the current situation analyzed the return on investment, residual income and economic value of continuing to run the business the same way. The current situation is definitely not logical based on the economic value and residual income listed below. Return on Investment: $46,118 / $491,150 = 0.094% = 9.4%   Residual Income: $46,118 - $491,150 = ($445,032)   Economic Value: $26,748 - ($491,150 x 7.5%) = ($10,088) Many options were examined to attempt to survive in the competitive Mexico furniture business and expand the business to the United States. Different systems such as quality and management control systems were evaluated. Analyzing cost relationships and behaviors was another possible way to save the company. Cutting back and strictly selling flame retardant was a possible idea. Garvin & Roberto (2001) stated, “decisions are made after developing a number of ideas, debating a variety of options, and encouraging an exchange of opinions in order to find the best course of action” (p. 1). The best course of action is often the deciding factors between a profitable firm and a firm on the verge of bankruptcy. Guillermo can only achieve its organizational goal through cooperation and sincere dedication of management and employees. References Anderson, J. C. (1995), Relationships in Business Markets: Exchange Episodes, Value Creation and Their Empirical Assessment. Journal of the Academy of Marketing Science, 23 (Fall), 346-350. Fundamentals of Management Control (2010), Retrieved from EWF-646-08 http://www.ewf.be/media/documentosDocs/doc_18_ewf-646-08-fundamentals-of-management-control.pdf Garvin, D. & Roberto, M.A. (2001). What you don’t know about making decisions. Harvard Business Review, 79(8), 108-116. Retrieved from http://search.ebscohost.com/login.aspx'direct=true&db=buh&AN=5134704& site=ehost-live Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2008). Introduction to Management Accounting, 14e. Retrieved from https://ecampus.phoenix.edu/content/eBookLibrary/content/eReader Quality Control and Quality Assurance (2010) Retrieved from IPCC Good Practice http://www.ipcc-nggip.iges.or.jp/public/gp/english/8_QA-QC.pdf University of Phoenix. (2010). The Guillermo furniture store. Retrieved from University of Phoenix, ACC561 website. University of Phoenix (2010). Retrieved from University of Phoenix https://ecampus.phoenix.edu/classroom/ic/classroom.aspx