GUILLERMO FURNITURE STORE ANALYSIS 1

Guillermo Furniture Analysis Reyna Downs, Kyle Neubauer, Alexis, Postell, Contessa Wright ACC/561 May 9, 2011 Christa Gallop

GUILLERMO FURNITURE STORE ANALYSIS 2 Guillermo Furniture Store Analysis Business volume has decreased for Guillermo due to current events in his community. Labor costs have increased due to the increase of the towns populations as well as the addition of new competitors. As a result of slow business, Guillermo must decide what he should do to keep his business afloat. He can make his current furniture more distinct, become a representative for a Norway manufacturer that is looking to expand their business in Guillermos area, or he can market his patented flame retardant. Guillermo must review cost relationships and behaviors, determine the managers decision-making prerogatives, compute the residual income, return on investment, and economic value added for the Guillermos scenario, create a breakeven analysis for the recent scenario bearing in mind the alternative, and decide what control systems should be used. Cost Relationships Cost relationships and behaviors are very import and should be taken into heavy consideration by Guillermo as he ventures out in making decisions for his company. One wrong move could cost the companys revenues to fall. His decisions not only affect the firm as a whole, they also affect the individual departments. Using the data to understand cost relationships and behaviors can give Guillermo the heads up that he needs to make the best informed managerial decisions for the company. Cost drivers are any output measures that cause costs (Burgstahler, Horngren, Schatzberg, Stratton, & Sundem, 2008). Adding cost drivers can cause cost to rise. If Guillermo does not take the adding and taking away of cost drivers into consideration when making decisions, he can accidentally add cost to departments, which can in turn lower profits.

3 Guillermo was considering marketing his flame retardant furniture to gain back business. Some cost drivers associated with this decision include marketing, materials to make the flame retardant, and employee working hours (employees will have to work longer hours because they will not only have to make the furniture, but also apply the retardant). Employee hours could increase, or the number of products produce could decrease. Guillermos decision to introduce the flame retardant could create cost drivers that may hurt marginal revenue, or create marginal profit. He needs to determine what approach would be beneficial for his company by examining necessary data. Ultimately, cost relationships and behaviors are important for Guillermo to understand because they can be the determining factor of what route he will take to try to increase profits. Control System Guillermo has been a successful business owner in the furniture manufacturing industry for many years. However, a new large competitor using high-tech approaches is beginning to create bigger challenges for Guillermos business, which can lead to profit losses. The furniture store owner and his enthusiastic management team are prepared to evaluate the best options to help them prepare to compete against the large company. Despite the competitors sophisticated business techniques, Guillermo is confident in his ability to attract customers with proper management skills, and ensure the quality of services provided continue to surpass the customers expectations. In pursuance of lasting success Guillermo and his management team began to analyze more effective business strategies, and establish attainable organizational goals. Some of the key factors taken into account included evaluating budget reports, financial statements, risks associated with sales forecasting, updated cost accounting methods, and a detailed review of the

4 companys code of ethics. In addition to the above-mentioned essential factors, the team emphasized the importance of evaluating and establishing a management control system. A management control system is a logical integration of techniques for gathering and using information to make planning and control decisions, for motivating employee behavior, and for evaluating performance (Burgstahler, Horngren, Schatzberg, Stratton, & Sundem, 2008, p. 386). The management control system is known to be beneficial in other growing companies. Thus the furnitures store owner believes the system will assist in improving a managers motivational skills as well as help coordinate the process through important decision-making for the business. As the management control system is implemented Guillermo and his team will plan and discuss long-term organizational goals and targets to be achieved in different areas of the company. The management control system can be highly beneficial to Guillermos store in that the process allows proper measure of performance and guidance toward motivating managers and subordinates (Burgstahler, Horngren, Schatzberg, Stratton, & Sundem, 2008). Some of the primary goals in the discussion to increase the stores opportunities for higher profits are listed on the following illustration: Organization Goals Exceed customer expectations Performance Measures Satisfaction index Number of repeat customers Maximize revenue Number of sales Product pricing Income before fixed cost Focus on innovation New products/services implemented per year

5 Number of employee suggestions Guillermo and his management team have identified different areas in which they will concentrate and take appropriate measures to improve and achieve organizational goals. Through research, benchmarking, and comparison of successful competitors the Guillermo Furniture Store leaders can recognize the most important tools that will help the company remain competitive and strong in the furniture industry. The company has been providing quality furniture for years, and with the managers expertise, and efficient business techniques, such as accurate budgeting, sales forecasting, effective cost accounting, management control system, and proper planning, the business has more opportunities to grow and increase the customers confidence. In addition, the application of high standards and ethics will add to the success of the organization. Break-even Analysis Guillermo Furniture managers are responsible for maximizing the companys profits while minimizing the companys costs. The first analysis a manager needs to examine is the break-even point for selling the units of each product. The contribution margin will tell the manager how much revenue is created by the selling of each unit of this product. To find the break-even point of each individual product line, you divide the total fixed costs by the contribution margin. A breakdown of each individual product line for Guillermo Furniture: High End Variable Costs Per Unit Direct Materials Direct Labor $250.00 $450.00 $140.00 $300.00 Mid Grade

6 Direct Cost per Unit $700.00 $440.00

Price per Unit Contribution Margin

$879.00 $179.00

$509.00 $69.00

Fixed Costs Salaries Utilities Benefits Insurance Property Taxes Depreciation Supplies Total Fixed Costs Breakeven Units $50,000.00 $9,000.00 $105,815.00 $3,000.00 $975.00 $50,000.00 $6,000.00 $224,790.00 1,256 $50,000.00 $9,000.00 $105,815.00 $3,000.00 $975.00 $50,000.00 $6,000.00 $224,790.00 3,258

Guillermo Furniture is a multiple product line company. When you evaluate the budgeted sales, Guillermo produces 5 mid-grade furniture units per one high end unit. To find the multiple product line break-even points per product line for high-end units, multiply the fixed costs by 1/6 and divide by the contribution margin. For the mid grade break-even point, multiply the fixed costs by 5/6 and divide by the contribution margin. High End Variable Costs Per Unit Direct Materials $250.00 $140.00 Mid Grade

7 Direct Labor Direct Cost per Unit $450.00 $700.00 $300.00 $440.00

Price per Unit Contribution Margin

$879.00 $179.00

$509.00 $69.00

Fixed Costs Salaries Utilities Benefits 0 Insurance Property Taxes Depreciation Supplies Total Fixed Costs Breakeven Units $50,000.00 $6,000.00 $224,790.00 209 $50,000.00 $6,000.00 $224,790.00 2,715 $3,000.00 $975.00 $50,000.00 $9,000.00 $105,815.0 0 $3,000.00 $975.00 $50,000.00 $9,000.00 $105,815.0

Guillermo Furniture is contemplating adding a product line of selling flameretardant separately from the high-end and mid-grade furniture. Looking at the table below, managers at Guillermo Furniture can recommend not adding the sale of flameretardant coating per liter separately from the sale of furniture. Flame Retardant Direct Cost per Unit $10.00

8 Price per Unit Contribution Margin $10.00 $0.00

Economic Computations The Residual Income (RI) for is net earnings minus debt payments. Return on investment (ROI) is profit before interest and tax divided by capital employed. Economic value of a company is net operating profit after taxes (NOPAT) minus the capital times the cost of capital. The calculations for Guillermo Furniture are listed in the table below. The RI and Economic Value both yield a negative. Budget Based RI ROI Economic Value $26,748 - $29,238 = ($2490) $46,118 - $1,177,360 = 3.92% $46,118 ($936,628 * 7.5%) = ($24,129.1) Actual Data Based (19,013) 29,238 = ($48,251) ($32,781) / $1,177,360 = 2.78% ($1,9013) - ($936,628 * 7.5%) = ($89,260.1)

Conclusion Guillermo Furniture managers must evaluate the financial performance of their company to ensure that they are maximizing profits and reducing operating costs. Not monitoring financial performance can lead to a companys destruction. Performing necessary calculations can give managers a glimpse of a companys future financial status. Guillermo will be better equipped to

9 make sound financial decisions by taking these figures into account. Budgets are beneficial tools. However, if the budget is not meeting the break-even point, the company will lose money for the year. Even though no company can ensure a positive earning year, they can use financial tools to assist in placing a safety net of security within their decision making efforts.

References Burgstahler, D., Horngren, C. T., Schatzberg, J., Stratton, W. O., & Sundem, G. L., (2008). Introduction to management accounting (14th ed.), 386 (9). Upper Saddle River, NJ: Pearson Prentice Hall.