BUSINESS ANALYSIS OF HARRY HUFNPUFF, INC.
Below is a description of a company, Harry Hufnpuff, which is involved in glassblowing. You are to prepare a 3 to 5 page report with an analysis of Harry's business and recommendations for improvement as indicated below. Be sure to include your financial computations as indicated below:
1. Read and assimilate the background materials indicated below
2. Prepare the following to assist Harry in saving his business:
1. An income statement for 2006 in traditional format. (Project the totals for the year.)
2. An income statement for 2006 in contribution format. (Project the totals for the year.)
3. Calculate breakeven point for a year’s activity including Harry’s desired net income.
4. Prepare a summary of specific recommendations for Harry to improve his cash flow.
Background and Details for the Harry Huffnpuff Glassblowing Case Assignment
Harry Huffnpuff is a skilled artist with a specialty in glassblowing. He worked for various companies as a glassblower for 25 years during which time he honed his skills to the point where he is able to create glass-blown art pieces of extremely high quality.
On January 1, 2006, Harry took the majority of his life savings and opened his own shop where he produces three products: vases, paperweights, and tumblers. His shop consists of the ovens and blowing room, the finishing and packing room, a storeroom, and a business office. He has one employee, Sam, a semi-skilled worker who works approximately 20 hours per week at $15 per hour. Sam packages and ships the finished goods, cleans the facility, and performs general handyman chores. Sam's hours each week will vary as needed. He is available for up to 40 hours per week.
The core of the glassblowing process is the oven. To prevent cracking of the lining of the oven, Harry fires it up when his production year begins and keeps it continuously fired during his 40 week production period. The oven has an estimated life of approximately 5 years.
Each week, Harry begins a new batch of glass for creation of his art pieces. He mixes the ingredients from carefully selected sources and on Sunday evening, prepares a 300-pound batch of glass which he keeps molten in his oven. This batch will yield at least 50% more products than Harry is currently producing. At the end of the week, unused glass is discarded. From Monday through Friday, he creates the pieces in a two-stage process. The pieces are shaped and colored in the oven room. This is referred to as "hot time" because the glass is in a molten phase. This work can only be done by Harry. The second stage consists of polishing and finishing the pieces and is accomplished in the finishing and packing room. This is referred to as "cold time" because the glass is now at room temperature. This work can be done by either Harry or Sam but, to keep Sam’s wages at a minimum, Harry does this work himself.
Harry sells his product to upper scale galleries who advertise and sell the products to consumers. All of the products are in high demand and Harry has at least a nine-month backlog of orders. He spends 40 weeks per year creating products, 10 weeks per year visiting galleries and art shows to keep his demand high, and two weeks per year in the mountains on vacation.
Harry sells the products for the following prices:
Item Price
Vases $60
Paperweights $40
Tumblers $10
Harry sells his products to the galleries in a predetermined mix of 6 vases, 4 paperweights, and 16 tumblers. He prices this bundle at $680 and galleries buy in multiples of this bundle. Harry spent January and February 2006 visiting galleries and taking orders. In the months that have followed, Harry has had no complaints from galleries about the composition of the bundle or the quality of the product. In fact the galleries mark up the products from 100% to 200% and generally sell out quickly. Many galleries have asked Harry to increase shipments of the product, but Harry is now working at his capacity. He is unwilling to take on another artist as his products are highly valued because of his talent and he fears another artist would not meet his standards.
The hot and cold times for each product are:
Item Hot Time Cold Time
Vases 20 min. 5 min.
Paperweights 15 min. 10 min.
Tumblers 10 min. 4 min.
Under this schedule, Harry is able to produce and ship an average of five bundles per week. Because of the delicate nature of the products, packaging and shipping costs are $80 per bundle. In addition, each bundle takes two hours of Sam’s time for processing and packing. Sam’s remaining time is spent on his other chores and is considered to be fixed.
Harry's costs are $6,050 for the 10 week period when he visits the galleries and art shows. These costs are fixed in nature.
During the weeks that Harry has been producing products, his other costs (exclusive of Sam and the packaging and shipping costs) have ranged from $2,300 when Harry produces four bundles to $3,300 when Harry produces six bundles. When Harry has produced five bundles per week, his other costs have averaged $2,800.
Harry’s dilemma is that he is working as hard as he can, sells all of his production but has very little positive cash flow. He feels he should be taking $25,000 (after his tax rate of 28%) in salary but is far short of that goal.