Guillermo Store
- Submitted by: anntanetteh
- Views: 1862
- Category: English
- Date Submitted: 04/05/2010 06:35 PM
- Pages: 8
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The purpose of this paper is to discuss and explain if the flame retardant furniture should be added to the Guillermo Furniture Store’s product line to improve the company’s profit. Guillermo Furniture Store is a small centralized company that produces hand-crafted, High-end and Mid-grade furniture. As Guillermo’s business advisors, we will discuss the company’s cost structure, display and explain a breakeven analysis table, and calculate and define the use of the return on investment (ROI) and residual income (RI).
Cost Structure
Guillermo’s cost structure is the expenses that must be considered when manufacturing the furniture. A management control system will be established to measure and monitor Guillermo’s standards. The direct (variable) cost is based on these standards. The direct cost for the High-end furniture of $700.00 per unit compared to the Mid-grade cost of $440.00 per unit. The direct cost includes the foam, labor, materials and wood. The direct cost for the chemicals is $2.00 per unit for the flame retardant furniture. The fixed cost for Guillermo includes the equipment and buildings. For every unit sold at a price higher than the variable cost of its production, Guillermo gains a contribution margin. Sales which the total contribution margins from Guillermo’s operations equal its fixed cost, which is the breakeven point.
Breakeven Analysis
The Guillermo Furniture Store has to make some very sound decisions based on the company’s latest performance numbers. The first two quarters of the year ended with the company facing a net loss as a result of inaccurate forecasting. Correcting this problem is altering the product mix is an estimate that is achievable. Tweaking will capitalize on the surprisingly exuberant sales of the mid-grade product. Favoring the mid-grade product will first increase sales and profit while simultaneously decrease variable costs related to the manufacture of the high-grade product. This will result in a higher...
Cost Structure
Guillermo’s cost structure is the expenses that must be considered when manufacturing the furniture. A management control system will be established to measure and monitor Guillermo’s standards. The direct (variable) cost is based on these standards. The direct cost for the High-end furniture of $700.00 per unit compared to the Mid-grade cost of $440.00 per unit. The direct cost includes the foam, labor, materials and wood. The direct cost for the chemicals is $2.00 per unit for the flame retardant furniture. The fixed cost for Guillermo includes the equipment and buildings. For every unit sold at a price higher than the variable cost of its production, Guillermo gains a contribution margin. Sales which the total contribution margins from Guillermo’s operations equal its fixed cost, which is the breakeven point.
Breakeven Analysis
The Guillermo Furniture Store has to make some very sound decisions based on the company’s latest performance numbers. The first two quarters of the year ended with the company facing a net loss as a result of inaccurate forecasting. Correcting this problem is altering the product mix is an estimate that is achievable. Tweaking will capitalize on the surprisingly exuberant sales of the mid-grade product. Favoring the mid-grade product will first increase sales and profit while simultaneously decrease variable costs related to the manufacture of the high-grade product. This will result in a higher...