Case Study: FORNER CARPET COMPANY Submitted To: Ms. Ma. Lourdes Salazar Submitted By: ANGELES, Jocris CRUZ, Kriska SUEGAY, Gwyneth July 13, 2011 I. Introduction Forner Carpet Company, the market leader in high-grade carpet materials, plans to expand/diversify its production, and replace its equipment, hence, a need for fresh capital. In order to support this endeavour, Forner imposed a price increase on its L-42 product to boost income. However, market response has been unsatisfactory, with the competitors acquiring some of Forner’s share. II. Statement of the Problem
What pricing strategy should Forner Carpet Company utilize in order to maintain the profitability of the L-42 line? III. Areas of Considerations The objectives of this case would be: 1. To identify the relevant and irrelevant costs and benefits in a decision; 2. To determine which pricing strategy yields to higher profits; 3. To consider other qualitative factors with regard to pricing strategy, this must be consistent with the expansion plans of the company. Below are the given data, as stated in the problem: III. Areas of Considerations [pic] [pic]
Direct Overhead -Material Handlers, Suppliers, Repairs, Power, Fringe Benefits Indirect Overhead -Supervision, Equipment Depreciation, Heat, and Light General Overhead -30% of Direct Labor Selling and Administrative-45% of Factory Cost Assumptions: 1. A total of 630,000 square yards of carpet were sold during the first half of 1994 2. 150,000 yards of carpet sold if price $3. 95; while 75,000 if price is $4. 75 3. The market share of Forner Carpet is not affected by the pricing behavior of the other market players. 4. The study focuses on Forner’s L-42 product line and assumes it’s independence from the company’s other products.
III. Analysis 1. What was the relationship (if any) between the L-42 pricing decision and the company’s future need for capital funds? The company needed to increase the price of L-42 to avoid a negative contribution margin as affected by the company’s need for large funds for equipment replacements and diversication. If the company retains their old price, these expenditures will absorb the contribution margin until it reaches a negative value. Thus, the increase in price is an anticipation of the company’s upcoming need for a large capital funds. 2.
Assuming no other prices are to be considered, should Forner price L-42 at $3. 95 or $4. 75? Treating Indirect Cost as Fixed Cost, hence irrelevant, and adjusting Selling and Administrative Expense to reflect only the variable costs: | |At 75,000 units | |At 150,000 units | |Direct Material |0. 52 |21. 66% | |0. 52 |22. 04% | |Material Spoilage |0. 051 |2. 12% | |0. 51 |2. 16% | |Direct Labor |0. 989 |41. 19% | |0. 975 |41. 33% | |Direct Overhead |0. 544 |22. 66% | |0. 52 |22. 04% | |General Overhead |0. 297 |12. 37% | |0. 293 |12. 42% | |Factory Cost |2. 401 |100. 00% | |2. 359 |100. 00% | Adjusted Selling and Admin |At 75,000 |At 150,000 | |45% of Factory Cost |1. 08045 |1. 06155 | | | | | | We compute for the following contribution margins: | | | |150,000 at 3. 95 | |75,000 at 4. 75 | | | | | |Per Unit |In amount |% | |Per Unit |In amount |% | |Sales | | | | 3. 95 | 592,500. 00 | | |4. 75 | 356,250. 00 | | |Variable Cost | | | | | | | | | | | |Raw Materials | | 0. 520 | 78,000. 0 |13. 16% | |0. 5200 | 39,000. 00 |10. 95% | | |Materials Spoilage | | 0. 051 | 7,650. 00 |1. 29% | |0. 0510 | 3,825. 00 |1. 07% | | |Direct Labor | | | 0. 975 | 146,250. 00 |24. 68% | |0. 9890 | 74,175. 00 |20. 82% | | |Direct Overhead | | 0. 520 | 78,000. 00 |13. 16% | |0. 5440 | 40,800. 00 |11. 45% | | |General Overhead | | | | | | | | | | |Selling and Admin | |1. 08045 | 162,067. 50 |27. 35% | |1. 0616 | 79,616. 25 |22. 35% | |Contribution Margin | | | 0. 804 | 120,532. 50 |20. 34% | |1. 5845 | 118,833. 75 |33. 6% | | | | | | | | | | | | | | | | | | | | | | | | | |NOI @ 3. 95 | 120,532. 50 | | | | | | | | | |NOI @ 4. 75 | 118,833. 75 | | | | | | | | | |Difference | | 1,698. 75 | | | | | | | | | | | | | | | | | | | | | | 3. If Forner’s competitors hold their prices at $3. 95, how many square yards of L-42 would Forner need to sell at a price of $4. 75 in order to earn the same profit as selling 150,000 square yards at a price of $3. 95? Projected Net Income120,532. 50 Contribution Margin per unit1. 5845 = 76,069. 74 units 4. What additional information would you wish to have before making this pricing decision? Despite the absence of this information, still answer Question 2! ) The company may consider qualitative factors aside from the quantitative factors (#2 answers) that would result or affect the company’s pricing decision. Examples of this are the quality of Forner’s carpet as compared to its competitors, the customer behavior towards price and customer loyalty. The company may also consider their competitors financial condition. This price increase would mean better products; thus, if the competitors are not in good financial condition, it would be difficult for them to compete with Forner’s improved products. 5.
With hindsight, was the decision to raise the price in 1993 a good one? The increase in price decision was a good decision because of the increase in margin that it contributes as compared to the old price of the product as based on the answers in question 2. Despite the lower market share, figures show that the company’s increase in price still results to a higher margin. Moreover, the company’s reputation also helps in supporting this price increase decision. Some customers’ perceptions are retained like that of Forner’s high competitiveness as compared to their competitors. V. Alternative Courses of Action a.
Decrease price to $3. 95 for the 1st half of 1994 – pro: • increase in market share to 23. 80% from 20% (150,000/630,000) – con: • lower profitability; • lower contribution margin b. Maintain price of $4. 75 for the 1st half of 1994 – pros: • higher profitability; • higher contribution margin; • more capital for future product diversification and machinery investments – con: • lower market share VI. Conclusions and Recommendations Based on the figures above, the group then concludes that Forner should increase their price to $4. 75 mainly because of its high potential to increase the contribution margin of the company.
One of the company’s reasons for increasing the selling price of L-42 was for additional funding needed for expansion and product diversification. With this increase in profitability, the group is positive that this value is achievable given higher efficiency and productivity of the company to produce greater quality products. Based on our analysis, it shows that the company would need to sell additional 1,069. 74 units to par with the sales when priced at $3. 95. This can be easily achieved by the company given improved machinery to produce more products. Aside from these factors, increase in machinery would mean higher level of automation.
Higher level of automation would mean lower direct labor cost; thus, another factor which will increase the contribution margin of the company. In order for the company to achieve its target profit, the group recommends the following action plans: 1. Offer attractive services to compensate the price increase(home and office delivery, generous return policies, etc. ) 2. Target advertising and promotions to reach the prospected customers. 3. Establish business’s industry knowledge as an additional resource for customers. 4. Make intelligent use of price strategies such as price bundling.
Information Technology Question
For this assignment research, a company or use one that you are familiar with that has experienced information security change in the workplace. What information assurance change occurred, and were there any barriers to the change faced by the organization? Finally, what are the best practices when managing change
Your work will be a two – three page APA paper.