Guillermo_Furniture_Store

Introduction Guillermo Furniture Store located in Sonora, Mexico is a local furniture store that offers traditional pieces and high-end custom pieces. Guillermo has faced many changes in the dynamic of his business location from growth and competition. Changes in the cost of labor and growth potential that can benefit Guillermo whi9le aligning his company for success in the future. To enable a well thought out plan, discussions of the areas of concerns are addressed in this paper. Cost relationships and behaviors The costs that effect Guillermo’s furniture store are the increase in labor costs, high-tech automation, foreign competitor with robotics and precision, growth of the communities in Sonora. The behaviors affecting the results of the cost increases Guillermo is considering are automating his mid-grade and high-end pieces, becoming a broker for a foreign competitor, or merging with a larger national company. Guillermo has patented a finish for furniture that is flame retardant that creates a value for his customers. The added value can be applied to his future if Guillermo decides to transfer his business to a brokerage house and distributor, which will not cut into his high-end business. Managers have to determine the costs that can be controlled and the variable costs that arise with routine business activities. The units produced are connected to various, each of which has a cost that affects the production. The different activities involved in creating a piece of custom furniture are the materials, labor, use of machinery, and other resources. The manager must be able to allocate all costs from within the organization, and cost drivers within the community where the business operates (Horngen, et.al.). Learning what each cost driver is, Guillermo can better determine the best course of action for his company he has rising costs as his company now operates, the alternatives and how the alternatives affect costs and time management. This recognition of cost and affect will determine the correct plan for Guillermo Furniture. Control systems Guillermo needs to research control systems that can allow the company to move forward and make the best decision for the company. Employing the cost, profit and investment centers according to Horngen, (et. al., 2008), will help Guillermo look at all areas of the business and add the controls that will prove most beneficial to the company. Cutting overhead, looking at alternative avenues can assist in the determination of what is best while maintaining the schedule he wants for both himself and his staff. Much of the added value and benefits come from the high-end and finish he applies to the furniture as it was patented. The largest area of concern with Guillermo furniture is the cost analysis especially since Guillermo is considering automation. He would better fair if he became a broker and offer to apply his flame retardant finish to the pieces and add value to the pieces coming from Norway. Break even analysis Understanding the break-even point of budget is critical to understanding what it will take to turn a profit. A break-even analysis is an analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point (" Break-Even Analysis," 2011). In order to determine the break-even point analysis of the budget, the profit had to be set to zero and the units of Mid Grade furniture is assumed to be zero (0), and the High End units sold are denoted by the variable “Z”, and the calculations are as follows: 0 = Net Earnings = Total Revenue – Cost of Materials – Labor – Benefits – Fixed Costs - Depreciation 0 = (Sales Price x Z) – (Mat. Cost x Z) – (Hourly Rate x Hours of Const x Z + $50,000) – 10% x (Hourly Rate x Hours of Const. x Z + 50000) – $13975 – $50,000 0 = $879Z – $250Z – $450Z – $50,000 – $45Z – $5,000 – $13,975 – 50,000 0 = $134Z – $123,975 $123,975 = $134Z Z = 925 units The same calculations can be used to figure out the units of Mid Grade Furniture that need to be sold to break-even when the high end sales equal zero (0) units. The Mid Grade unit sales would equal 3,179 units. When the points (0, 925) and (3179, 0), shown in Table 1 are graphed (Figure 1), a linear regression analysis can be completed to get a better picture of the range of unit combinations that can cause a break-even point for Guillermo Furniture. Figure 1 Table 1 From the linear regression analysis, the possibilities of break-even rest along the line and can be calculated via the equation listed on the graph in figure 1. As far as the flame retardant chemical sales effects on the break-even point, there would be none. The cost to produce the flame retardant is $2 per liter and the market value for the chemical is $10 per liter. Since the plant can only produce 62 liters of flame retardant chemicals annually, the net revenue would equal $496 annually or $41.33 a month. This would be the equivalent to selling an additional 2 units of mid grade furniture or 1 unit of high end furniture a year. The flame retardant chemical will cost the company additional revenue in the form of labor costs and benefits, thus reducing the possible profits extrapolated from selling this product. In the grand scheme of the overall business, this venture should be shelved unless the market price for the chemical can be driven higher or the formula can be sold to a company that can better market this product, such as a paint company. Return on Investment, economic value and residual income Return on investment (ROI) is a calculation used to determine how much has to be invested to gain an income. Guillermo Furniture has been faced with struggling times and as a benefit to further analyze the overall operations of the company the break down is below; to calculate return on investment the formula is: ROI = Income / Investment ROI= $1,770,139 / $491,176 ROI=1.4 The numbers utilized above are actual revenue figures from Guillermo’s budget information under the actual amounts received and the investment amount is from the total cost of goods sold for the current year. This is a very low percentage which shows that under the current operating plan Guillermo has to sell 1.4 times as many pieces to gain an income and show a profit. The current budget reflects that this year he is operating at a loss (Guillermo case file, 2011). Economic profit also known as residual income (RI) is a measurement of performance as to how much will it cost to acquire more capital for the purpose of operations (Horngen, et.al.2008). To calculate this figure: After tax operating 23,857 Investment charge x investment (.08 x 491,176) -39,294 Economic profit/residual income (15,437) Under the current course of operations Guillermo is operating at a loss which reiterates the information gained when the return on investment was calculated. The final area to analyze when measuring operations and performance is the economic value added the calculations are as follows; EVA = After tax operating – capital charge x amount of the investment After tax operating amount is $ 23,857 Capital charge is 8% Amount of the investment is average assets $1,351,485 EVA=23857- (.08*1351485) = (84,261) (Horngen, et al, 2008) Economic value-based on the current operations again is running at a loss Guillermo Furniture Store is paying too much to gain more capital thus is taking a larger amount out of the income line with which it operates. Furthering the concerns in going forward that would likely cause huge losses. Conclusion In conclusion this analysis has shown reasons to further develop plans to gain alternate methods of sales that arose from the economic event that surround Guillermo Furniture Store. The analysis shows the break-even points that considering the current situation Guillermo would have a vastly difficult agenda if he chooses to stay the current course. His plans and idea that are viable from the current standpoint may prove that Guillermo would benefit from converting to a brokerage and supplement that with the high-end pieces while offering custom furniture. This decision lowers overhead and limits the large conversion issues companies’ face with mergers and acquisitions. References Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2008). Introduction to management accounting (14th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Break-even analysis. ( 2011). In Investopedia.com. 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