Over the past few years, Mr. John Filmore, owner of the Filmore Furniture Company, has grown...

        

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Over the past few years, Mr. John Filmore, owner of the Filmore Furniture Company, has grown increasingly concerned over the performance of the company's chairs division, which is located near Peterborough, Ontario. The company is well-established and enjoys a good reputation and good relationships with its retailers. However, sales of the company's chairs in 2018 were no higher than three years earlier, and profits have declined by nearly 24%, from $340,000 in 2015 to $260,000 in 2018, as the following comparative income statements show. FILMORE FURNITURE COMPANY Revenues Cost of Goods Sold: Opening inventory Materials Labour - Closing inventory Gross profit Expenses: Salaries Marketing General & Admin Total INCOME STATEMENT ($ thousands) 2015 $3,600 350 1,290 1,270 370 2,540 1,060 CHAIRS DIVISION 300 250 170 720 2016 $3,620 370 1,300 1,320 400 2,590 1,030 300 250 170 720 2017 $3,630 400 1,300 1,340 430 2,610 1,020 310 260 170 740 2018 $3,610 430 1,290 1,380 490 2,610 1,000 320 270 150 740 Operating Profit Note: all financial statements presented in this case are included in the EXCEL file "Case 5- Filmore excel sheet (2018)" 340 310 280 260 The Industry and Economic Environment In the early 1990s, the Canadian furniture industry suffered from a combination of economic recession and growing import competition. After 1994, conditions improved as the economy recovered and the decline in the Canadian dollar made imports more expensive. Nonetheless, through the 2000's sales growth in general has been relatively slow (3% to 5% annually), and competition from both domestic and foreign producers very strong. Several Canadian furniture manufacturers closed, while others had used the breathing space provided by the low Canadian dollar to reposition themselves in the market and to improve efficiency in preparation for the increased competition that is expected in the future. Then the 2016 election of Donald Trump as President of the United States plunged the industry into uncertainty again. Trump had stated that protection of jobs in the US furniture industry was a priority. The renegotiation of the free trade agreement among Canada, Mexico, and the US was also causing concern in the Canadian industry. Finally, in a desperate ploy for re-election, the Ontario Liberals had increased the minimum wage by 30%, from $11.60 to $15.00 per hour. Since approximately one-third of Filmore's workers earned the minimum wage, this had an adverse impact on the Company's labour expenses. The Chair Division The Peterborough plant of Filmore Furniture has a skilled work force that is quite loyal to the company, mainly because it provides reasonably steady employment in an area where much employment is seasonal and unemployment is high. The plant produces three basic models of chairs, in a variety of colours, finishes and fabrics. The "Filmore" model is one of the company's original designs, a standard model that has always sold reasonably well, and remained the Division's second best-selling chair. The market for this type of chair has been growing slowly but steadily in recent years, and while no "official" market share statistics exist, Filmore's sales representatives report that the company appears to be holding onto its share of this market. As a result, sales of the "Filmore" have been rising slowly but steadily. Due to the design of the "Filmore", its production involves an above-average amount of labour. The "Caledonia" model is a more modern design of a type that has sold very well in recent years.. In this briskly-growing market, Filmore Furniture has done unexpectedly well, obtaining a growing share of the market even in the face of competition from IKEA's popular "Sundin" model. In fact, sales have been so brisk that on several occasions, the "Caledonia" has been on backorder, and retailers have had to wait several weeks for deliveries. Production of the "Caledonia" requires less labour than the other models, primarily due to the use of modern wood-forming machines that the company imported from Norway in the early 2000s, at a cost of $250,000. The plant foreman and woodworkers agree that this equipment could be modified to use in the production of the "Filmore" model; however, this has not been done. The company has needed all the machines it has for production of the "Caledonia" chair, and its declining profits and heavy debt load have made management reluctant to spend on more equipment or on expansion of the plant. In fact, John Filmore had stated that no capital investment could be made unless its payback period was two years or less. Even then, the expenditure would be closely scrutinized. The "Parkdale" model is a traditional stuffed armchair design that the company has produced since it was established. It is a personal favourite of John Filmore's mother, who together with John's father founded the company. However, as styles have changed, the market for this type of furniture has decreased in recent years, and Filmore's sales representatives report that the company's share of this market has also been declining. Over the past two years, the company's inventories of this model have risen as retailers have reduced their orders. The production of this model involves two steps. First, there is the construction of the wooden frame in much the same way as the other models by the company's woodworkers, who are on a job rotation system that moves them from model to model. This is followed by the addition of the upholstery by skilled workers. As a result, the production of the "Parkdale" model requires more labour than the other models. In order to retain skilled upholsterers, in recent years the company had to increase their wage rates more rapidly than those of other plant employees, who have felt that they were being treated unfairly. By the end of 2018, John Filmore had grown quite concerned about the future of the company's chairs division. On the suggestion of a consultant, the company's income statements for the past four years were broken down in an attempt to determine the revenues and costs for each of the three models. For manufacturing costs, this could be done quite precisely, as the following statements show. For other expenses, this was not possible, so these were simply allocated to each model according to that model's percentage of sales revenues for instance, since the "Caledonia" accounted for 36% of 1998 sales, 36% of non-manufacturing expenses ($740,000 in total) were attributed to it. The allocation was arbitrary, but no-one had suggested a better method of dealing with overhead costs. This allowed the revenues and costs for each of the company's three models of chairs to be identified, as shown on the following pages. On the basis of this information and the information provided in the foregoing, what would you recommend that management do concerning the chair division of the company? 3 Revenues Cost of Goods Sold: Opening inventory Materials Labour - Closing inventory Gross profit SG&A (Overhead): (prorated by sales) Operating Profit REVENUES & COSTS "CALEDONIA" MODEL ($ thousands) 2015 $1,000 100 360 290 100 650 350 200 150 2016 $1,080 100 390 300 100 690 390 220 170 2017 $1,180 100 430 310 90 750 430 240 190 2018 $1,300 90 470 330 100 790 510 270 240 Revenues Cost of Goods Sold: Opening inventory Materials Labour - Closing inventory Gross profit SG&A (Overhead): (prorated by sales) Operating Profit 2015 $1,200 120 430 420 130 840 360 240 120 "FILMORE" MODEL ($ thousands) 2016 $1,220 130 440 440 140 870 350 240 110 + 2017 $1,250 140 440 470 150 900 350 260 90 2018 $1,280 150 450 510 160 950 330 260 70 Revenues Cost of Goods Sold: Opening inventory Materials Labour - Closing inventory Gross profit SG&A (Overhead): (prorated by sales) Operating Profit 2015 "PARKDALE" MODEL ($ thousands) $1,400 130 500 560 140 1,050 350 280 70 2016 $1,320 140 470 580 160 1,030 290 260 30 2017 $1,200 160 430 560 190 960 240 240 0 2018 $1,030 190 370 540 230 870 160 210 (50) 1) Conduct a SWOT of the case. 2) What do you recommend they should do and why? Over the past few years, Mr. John Filmore, owner of the Filmore Furniture Company, has grown increasingly concerned over the performance of the company's chairs division, which is located near Peterborough, Ontario. The company is well-established and enjoys a good reputation and good relationships with its retailers. However, sales of the company's chairs in 2018 were no higher than three years earlier, and profits have declined by nearly 24%, from $340,000 in 2015 to $260,000 in 2018, as the following comparative income statements show. FILMORE FURNITURE COMPANY Revenues Cost of Goods Sold: Opening inventory Materials Labour - Closing inventory Gross profit Expenses: Salaries Marketing General & Admin Total INCOME STATEMENT ($ thousands) 2015 $3,600 350 1,290 1,270 370 2,540 1,060 CHAIRS DIVISION 300 250 170 720 2016 $3,620 370 1,300 1,320 400 2,590 1,030 300 250 170 720 2017 $3,630 400 1,300 1,340 430 2,610 1,020 310 260 170 740 2018 $3,610 430 1,290 1,380 490 2,610 1,000 320 270 150 740 Operating Profit Note: all financial statements presented in this case are included in the EXCEL file "Case 5- Filmore excel sheet (2018)" 340 310 280 260 The Industry and Economic Environment In the early 1990s, the Canadian furniture industry suffered from a combination of economic recession and growing import competition. After 1994, conditions improved as the economy recovered and the decline in the Canadian dollar made imports more expensive. Nonetheless, through the 2000's sales growth in general has been relatively slow (3% to 5% annually), and competition from both domestic and foreign producers very strong. Several Canadian furniture manufacturers closed, while others had used the breathing space provided by the low Canadian dollar to reposition themselves in the market and to improve efficiency in preparation for the increased competition that is expected in the future. Then the 2016 election of Donald Trump as President of the United States plunged the industry into uncertainty again. Trump had stated that protection of jobs in the US furniture industry was a priority. The renegotiation of the free trade agreement among Canada, Mexico, and the US was also causing concern in the Canadian industry. Finally, in a desperate ploy for re-election, the Ontario Liberals had increased the minimum wage by 30%, from $11.60 to $15.00 per hour. Since approximately one-third of Filmore's workers earned the minimum wage, this had an adverse impact on the Company's labour expenses. The Chair Division The Peterborough plant of Filmore Furniture has a skilled work force that is quite loyal to the company, mainly because it provides reasonably steady employment in an area where much employment is seasonal and unemployment is high. The plant produces three basic models of chairs, in a variety of colours, finishes and fabrics. The "Filmore" model is one of the company's original designs, a standard model that has always sold reasonably well, and remained the Division's second best-selling chair. The market for this type of chair has been growing slowly but steadily in recent years, and while no "official" market share statistics exist, Filmore's sales representatives report that the company appears to be holding onto its share of this market. As a result, sales of the "Filmore" have been rising slowly but steadily. Due to the design of the "Filmore", its production involves an above-average amount of labour. The "Caledonia" model is a more modern design of a type that has sold very well in recent years.. In this briskly-growing market, Filmore Furniture has done unexpectedly well, obtaining a growing share of the market even in the face of competition from IKEA's popular "Sundin" model. In fact, sales have been so brisk that on several occasions, the "Caledonia" has been on backorder, and retailers have had to wait several weeks for deliveries. Production of the "Caledonia" requires less labour than the other models, primarily due to the use of modern wood-forming machines that the company imported from Norway in the early 2000s, at a cost of $250,000. The plant foreman and woodworkers agree that this equipment could be modified to use in the production of the "Filmore" model; however, this has not been done. The company has needed all the machines it has for production of the "Caledonia" chair, and its declining profits and heavy debt load have made management reluctant to spend on more equipment or on expansion of the plant. In fact, John Filmore had stated that no capital investment could be made unless its payback period was two years or less. Even then, the expenditure would be closely scrutinized. The "Parkdale" model is a traditional stuffed armchair design that the company has produced since it was established. It is a personal favourite of John Filmore's mother, who together with John's father founded the company. However, as styles have changed, the market for this type of furniture has decreased in recent years, and Filmore's sales representatives report that the company's share of this market has also been declining. Over the past two years, the company's inventories of this model have risen as retailers have reduced their orders. The production of this model involves two steps. First, there is the construction of the wooden frame in much the same way as the other models by the company's woodworkers, who are on a job rotation system that moves them from model to model. This is followed by the addition of the upholstery by skilled workers. As a result, the production of the "Parkdale" model requires more labour than the other models. In order to retain skilled upholsterers, in recent years the company had to increase their wage rates more rapidly than those of other plant employees, who have felt that they were being treated unfairly. By the end of 2018, John Filmore had grown quite concerned about the future of the company's chairs division. On the suggestion of a consultant, the company's income statements for the past four years were broken down in an attempt to determine the revenues and costs for each of the three models. For manufacturing costs, this could be done quite precisely, as the following statements show. For other expenses, this was not possible, so these were simply allocated to each model according to that model's percentage of sales revenues for instance, since the "Caledonia" accounted for 36% of 1998 sales, 36% of non-manufacturing expenses ($740,000 in total) were attributed to it. The allocation was arbitrary, but no-one had suggested a better method of dealing with overhead costs. This allowed the revenues and costs for each of the company's three models of chairs to be identified, as shown on the following pages. On the basis of this information and the information provided in the foregoing, what would you recommend that management do concerning the chair division of the company? 3 Revenues Cost of Goods Sold: Opening inventory Materials Labour - Closing inventory Gross profit SG&A (Overhead): (prorated by sales) Operating Profit REVENUES & COSTS "CALEDONIA" MODEL ($ thousands) 2015 $1,000 100 360 290 100 650 350 200 150 2016 $1,080 100 390 300 100 690 390 220 170 2017 $1,180 100 430 310 90 750 430 240 190 2018 $1,300 90 470 330 100 790 510 270 240 Revenues Cost of Goods Sold: Opening inventory Materials Labour - Closing inventory Gross profit SG&A (Overhead): (prorated by sales) Operating Profit 2015 $1,200 120 430 420 130 840 360 240 120 "FILMORE" MODEL ($ thousands) 2016 $1,220 130 440 440 140 870 350 240 110 + 2017 $1,250 140 440 470 150 900 350 260 90 2018 $1,280 150 450 510 160 950 330 260 70 Revenues Cost of Goods Sold: Opening inventory Materials Labour - Closing inventory Gross profit SG&A (Overhead): (prorated by sales) Operating Profit 2015 "PARKDALE" MODEL ($ thousands) $1,400 130 500 560 140 1,050 350 280 70 2016 $1,320 140 470 580 160 1,030 290 260 30 2017 $1,200 160 430 560 190 960 240 240 0 2018 $1,030 190 370 540 230 870 160 210 (50) 1) Conduct a SWOT of the case. 2) What do you recommend they should do and why?

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Answer SWOT analysis is a strategic planning tool used to identify and analyze the Strengths Weaknesses Opportunities and Threats involved in a business venture or project It helps organizations under... View the full answer