Guillermo Furniture Recommendation 1
Learning Team B
Guillermo Furniture Store Recommendation
Michelle Powell, Kevin Schumann, and Leigh McManus
University of Phoenix
FIN 571
Eric Hohl, Instructor
June 15, 2009
Guillermo Furniture Scenario
The University of Phoenix Guillermo Furniture Store Scenario is interesting as several alternatives impact business planning and control (2009). To effectively choose an alternative, Mr. Navallez must examine relevant quantitative and qualitative information.Glances at four alternatives arepresented in the chart below.
Alternative / Pros / Cons / Needed informationMerge / Efficient, cost effective production
Requires less manpower / Furniture no longersold at quality standard
Does not like the idea of other countries’ involvement in making his product
Significant equipment costs / Current production counts/costs
Determine cost of equipment upgrades
Distribute / Has country-wide chain connections
Can continue some manufacturing / Shifts from manufacturing to distributing / Forecast of potential profits versus current profit margin
Consider opportunity cost for different production
Capitalize on flame retardant processing/ production / Has unique chemical patent
Consumers see this as important / If this part of the process of flame retardant and coating as a package, the market may not support it at its current expense / Use on furniture via distribution
Pursue coating processing/ production / Appears to be cheap and generates revenue at low costs
Revamp business to focus on production as a component of unfinished furniture from other sources / Market may not support this product / Utilization on furniture via distribution
Recommendation
Analysis begins by reviewing budgeting and performance information. The March production report shows plant capacity as well as direct costs of each component needed in furniture manufacturing. Plant capacity shows middle grade at 5170 and high end grade at 1034. The June variance analysis indicates the middle grade actual was higher than budgeted while high end was not while sales forecasting from the budget spreadsheet show actuals at 2787 for middle and 421 for high. The assets, liabilities and equity information shows that sales have decreased by 1% during a one year period.Management by exception is an option to consider; changing or increasing capacity thus increasing sales.
The income information spreadsheet indicates great net operating margins and net income but there is significant overhead by using High Tech methods proving a merger may be profitable. Ethically, Mr. Navallez does not care for this option because he sees that High Tech would cut into overhead and intense management would interrupt personal time with his family. He could invest in the same equipment used by High Tech to manufacture his furniture but this requires him to make a commitment to opportunity costs. These factors contribute to a sell or process decision.
Mr. Navallez must look at what others are doing, referred to by Emery et al as the “Behavioral Principle” in determining the best financial outcome for his business (Emery, D.R., Finnerty, J.D. & Stowe, J.D., 2007). This will assist him in weighing the pros and cons of the most cost effective way to conduct business without imitating the competition.Becoming a distributor offers Guillermo Furniture existence but shifts work to distribution. Income information shows this as a high margin and high overhead project with good net income return. Some overhead comes from hiring an overseer of maintenance.
March production reports flame retardant at 62 volumes versus the plant’s potential output of nearly three times that amount. The coating on the other hand was 310 volumes versus potential output of 465. This shows that consumers favor coating. Utilizing the existing patent, Mr. Navallez could continue using this process of flame retardant and alternately use the cheaper product to make his coating. Maintaining the same cost, he could replace the expense of the flame retardant with that of the priciercoating hence pricing decisions.
With total assets and liabilities being less than the previous year and total equity being more, Mr. Navallez considersimpacts of additional equipment, personnel and technology. Currently, he is producing $270,908 in net operating margins with $224,790 being overhead, leaving $46,118 as net income. An incremental analysis would show his best option as becoming a distributor and working out a deal to use his existing coating product on their pieces. With a large network, people trust Mr. Navallez and his products. He could include his personalized guarantee on the products by integrating the two concepts. This would allow for him to focus primarily on distribution but allow him to some degree to continue his passion of manufacturing.
Based on WACC calculations, each alternative offers an A+ rating and return on equity has little variance among provided options.It is important to remember that “misusing a firm’s WACC to evaluate new projects could lead a firm with low operating risk, such as a utility, to take on high-risk projects, such as drilling and exploratory oil wells” (Emery, D.R., Finnerty, J.D. & Stowe, J.D., p.200, 2007). Financially, the riskless debt for each alternative isapproximately 231 suggestive of a few choices. Operationally, there are many methods for achieving the same outcome, in this case furniture manufacturing, but profits remain sensitive to sales resulting in larger impact on investment risk.
Justification of Recommendation
While sources of financial information contain limitations and some of the information is historical in nature, Guillermo Navallez can use it to make pertinent business decisions and create a new operating structure, if needed. Profitability, market value and book value are all pieces needed to compare prices, earnings, assets, liabilities and dividends. Mr. Navallez must remember that over time financial information has changed just as the economy has changed.
Again, Mr. Navallez must bear in mind that the market value of any investment, in his case each alternative, is different than the net present value investment by its costs.Overall, the differing costs drive the decision. In this case, the business has the capability to produce a quality finish at a reasonable price. It does not require a merger but helps Guillermo Furniture maintain its independence. By working with a competitor, not interested in selling products through outlets, the result will be high future earnings for both parties.
References
Emery, D.R., Finnerty, J.D. & Stowe, J.D. (2007). Corporate Financial Management (3rd Ed.). Upper Saddle River, NJ: Prentice Hall.
University of Phoenix.(2009). Guillermo Furniture Store Scenario. Retrieved May 7, 2009 from University of Phoenix, Week One, rEsource. FIN 571-Finance Course Website: