Guillermo_Furniture_Store_Scenario

Running head: GUILLERMO FURNITURE STORE SCENARIO Guillermo Furniture Store University of Phoenix ACC/561-Accounting February 15, 2010 Guillermo Navallez is a successful custom furniture manufacturer in Sonora, Mexico. He is now faced with the decision of which direction to take his business, after a new international competitor entered the market and one of the largest furniture retailers opened their business in the community. These events caused a dent in his business as he was faced with falling prices and rising costs. Guillermo has several alternatives to consider in an attempt to offset these challenging events and keep his business afloat. After doing some research, and weighing his options, Guillermo knew that a merger is something he is not willing to consider; this leaves a few other possible solutions to consider which are: converting his production to the high-tech laser lathe which could be very expensive but would cut the cost of production dramatically; becoming a representative or partner with another Norwegian manufacturer, or continue focusing on his already patented process for creating a coating for his furniture. In the decision making process; Guillermo must first look at the existing budget and performance reports. A budget is the quantitative expression of a plan of action which also helps to coordinate and implement plans and the performance reports provide feedback by comparing results with plans and by highlighting variances, which are deviations from plans (Horngren, 2008). The projected information can be used for labor hours and production value to assess the profits if the decision is made to sell coated furniture. The budgeted information will also assist him in assessing the profitability of the high end manufacturing that he plans on retaining if the decision is made to become a representative. Guillermo will have a good estimate of the net revenue and net earnings from the budgeted net revenue if he sells the coated furniture. The performance reports, particularly the income information will give him the comparative figures that he can expect to earn using the current method verses, the hi tech method and becoming a representative. In using the current method he can expect a net income before taxes of 46,118, if he chose to use the hi- tech method he can expect a net income of about 213,000 and if he decides to become a broker he can expect a net income of about 65,000. In order to make a decision Guillermo will need to consider the investment he will need to make for each option going forward, especially the hi-tech one. The production data for the flame resistant coating gives Guillermo the exact estimate of making flame resistant and fully treated furniture. A comparison of this estimate with the actual price can assist in realizing for the products According to the Encyclopedia of Business and Finance, “ethics in accounting is of utmost importance to accounting professionals and those who rely on their services.” Ethics will influence Guillermo's accounting decisions in many ways. He will have to make accounting decisions when he prepares the budget for the hi-tech decision making process. He has to exhibit honestly the profits he is capable of earning under each method. The mortgage payment in particular makes his debt to equity ratio not favorable. He has to truthfully present his debt equity situation when he attempts to finance his hi-tech manufacturing option. Guillermo’s accounting decisions should be ethical and upfront with respect to taxation, the calculation of overheads, estimated broker costs, and the expected labor rate and production capacity. Integrity may also influence Guillermo's decision especially if he goes in for hi-tech production. There is a possibility he will have to lay off a large number of employees and may feel that it is an act of poor moral worth. Moreover, if he wants to become a broker this would involve promoting a foreign company and he may decide against that option from the substantial ethics perspective. I believe that the accounting information that is most relevant for Guillermo to consider is the net income before taxes he can earn in each option. However, this information should be compared with the additional investment he has to make in each option and the cost of capital he has to incur in order to make the investment. He should then compare the additional net income before taxes that he will earn with the additional cost of capital. In both the broker and hi-tech option there is an increased level of depreciation charges. It is likely that the additional cost of capital he may incur for acquiring hi-tech machinery is not included in the depreciation cost. References Encyclopedia of Business and Finance. Ethics in Accounting. Retrieved on February 15, 2010, from: http://www.enotes.com/business-finance-encyclopedia/ethics-accounting Introduction to Management Accounting: Chapter 1, Fourteenth Edition, by Charles T. Horngren, Gary L. Sundem, William O. Stratton,David Burgstahler, and Jeff Schatzberg. Published by Prentice Hall. Copyright © 2008 by Pearson Education, Inc.