Peter Schultz IV, president of Schultz Quality Furniture, takes pride in carrying on a tradition of manufacturing custom quality furniture, a skill that was started by his great-grandfather in southern Germany almost 100 years ago. In the 1930, Peter's grandfather immigrated to the Unites States and settled in Pennsylvania where he incorporated the furniture business.
Throughout its existence, the company has focused on the high end of the furniture line and remained relatively small. They were not interested in getting into the mass production of lesser quality items. Their workmanship and quality of product have attracted a loyal following of customers and clients who are willing to pay a premium for Schultz furnishings.
Over the years, Schultz has changed their focus and emphasis to meet changing consumer preferences and desires, however, some of the original designs are still being manufactured in certain pieces. While the core business has remained strong and fairly consistent, the company will sometimes venture off into some other markets and specialties.
Just two years ago, Peter Schultz IV purchased the controlling interest in Garden Patios Deluxe. This is a small company which specialized in making high-end patio and outdoor garden type furniture. The furniture is sturdy, rust resistant and uses quality materials which resist weathering and fading for a number of years. Peter thought this line of furniture would be a good compliment to his company since Garden Patios Deluxe concentrate on the superior quality furniture, have a relatively small operation, and support a loyal customer base. Also, with the general trend of the population now entertaining more and enjoying the outdoors, there seemed to be a sustainable market for patio furniture of this type.
So far, the operation of Garden Patios Deluxe has been a success. The company is bringing in a profit, but it has been a little harder to attract a market than Peter first imagined. The northern climate can tend to limit the outdoor season, and it seemed that people did not want to pay a lot of money for patio furniture that would have to be in storage for half the year.
As a matter of course, Peter likes to review the manufacturing process for the different furniture lines about every eighteen months. He was interested in getting a detailed breakdown on the production cost and methods used to make the patio tables and chairs.
The material is a specially developed compound of structurally sound polymers, which is molded and heat treated by a supplier. The compound comes in four basic colors of beige, forest green, gray and white. The furniture pieces are constructed at the Garden Patios plant and parts like the fabric seats, glass inlays, and other decorative features are assembled.
The plant used in this manufacturing capacity is operating at about 90% of capacity, although there are some seasonal fluctuations. The busy season is from November through May prior to the outdoor entertainment season. In the summer, much time is spent in redesign and testing of new models or experimenting on variations in existing product lines.
One of the most popular pieces made by Garden Patios Deluxe is a simple armchair. The chair has a molded frame that comes in about 4 pieces along with a contoured fabric seat. The chairs can be retailed in a set with a table or sold separately. They are extremely comfortable and lightweight.
Peter wanted to know the actual cost of manufacturing a single chair. The following unit cost are identified. The total costs are based on a normal annual volume of 40,000 chairs. The current selling price of the chairs is $75 each.
|
Item
|
Costs/Unit
|
Costs/Unit
|
Total Costs
|
|
Materials
|
|
|
|
|
Main Frame
|
9.00
|
|
$360,000
|
|
Chair Arm
|
2 @ $1.75 = 3.50
|
|
140,000
|
|
Stand
|
4.50
|
|
180,000
|
|
Fabric Seat and Back
|
5.00
|
|
200,000
|
|
Related Supplies
|
2.00
|
|
80,000
|
|
Total Materials
|
|
$24.00
|
960,000
|
|
Labor
|
|
|
|
|
Fabric Labor
|
30 min @ $10 = 5.00
|
|
200,000
|
|
Assembly Labor
|
20 min @ $12 = 4.00
|
|
160,000
|
|
Total Labor
|
|
9.00
|
360,000
|
|
Fixed Overhead
|
|
|
|
|
Manufacturing
|
150% of Labor = 13.50
|
|
540,000
|
|
Administrative
|
25% of Material = 6.00
|
|
240,000
|
|
Total Fixed Overhead
|
|
19.50
|
780,000
|
|
Total Manufacturing Cost
|
|
$52.50
|
$2,100,000
|
Required:
1. If Schultz Quality Furniture sells all 40,000 chairs, how much will the company make on the chairs?
2. If the company is able to produce and sell 44,000 chairs, how much will the company make on the chairs?
3. What is the marginal cost of making one additional chair?
4. During the off season, a special order for 3,000 chairs has come in from an oversees government agency. However, because of the currency exchange rate, this company is only willing to pay $50.00 per chair, but Schultz will have to pay a shipping and tariff cost of $5 per chair. Should Schultz Quality Furniture accept this order? How much money will the company make or lose on this order?
5. The supplier who provides the special polymer material for the chairs has introduced a proposal to ship the chairs to Schultz fully assembled for $50.00 per chair, which is less than the current manufacturing cost to Schultz of $52.50. All Schultz would have to do is send the chairs out to their customers. Should Schultz accept the offer? How much money will the company make or lose on this offer?
6. The marketing manager believes that the customer base for chairs is pretty strong and that a price increase to $80 per chair would only reduce demand by 2,000 chairs. Should Schultz implement a price increase? If the actual price per chair were increased to $80, how far could the annual demand for chairs decline before Schultz would be indifferent between the $75 price and the $80 price?
7. What nonfinancial issues should be considered before decisions are made regarding the production and sale of these chairs?