WEEBER GRILL COMPANY In September of 2010 Cheryl Lester, marketing vice president of Weeber Grills was...
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WEEBER GRILL COMPANY In September of 2010 Cheryl Lester, marketing vice president of Weeber Grills was mulling over the discussion she had the previous day with Tom Spencer, a buyer from House Depot Stores, Inc. House Depot operated a chain of home improvement and construction products and were the best-sellers of Weeber Grills. House Depot's sales had grown to the extent that it was beginning to add a "house-brand" (also called a "private label") merchandise to the product lines of several of its departments. Mr. Spencer, House Depot's buyer for outdoor living, had approached Ms. Lester about the possibility of Weeber producing the grills for House Depot. The grills would bear the name "Genesis," which House Depot planned to use for all its house-brand outdoor living. Fifty years ago, after he became frustrated with the uneven and uncontrollable flame of open brazier grilling at his Mount Prospect, Illinois home, determined backyard griller George Kempster Sr. set out to build a better grill that would protect his precious steaks from the wind and possible downpours - while sealing in a tasty smoked flavor. Kempster ingeniously cut a metal buoy in half and fashioned a dome shaped grill with a rounded lid - and the classic original Weeber kettle was born. His invention quickly gained a loyal audience and ultimately became a prominent symbol of Americana. In the 1960s and 1970s, Weeber's reputation grew beyond the Midwest, as it became a nationally known brand with distribution in retail stores all over the country - introducing covered grilling to the rest of the country. Sales were currently at an annual rate of about $10 million. (The company's 2008 and 2009 financial statements appear in Exhibit 1.) Most of Weeber's sales were through independently owned outdoor and patio furniture stores. Weeber had never before distributed its grills through department store chains of any type. Ms. Lester thought that Weeber had the image of being above average in quality and price but not a "top of the line" grill. House Depot's proposal to Weeber had features that made it quite different from Weeber's normal way of doing business. First, it was very important to House Depot to have ready access to a large inventory of grills, because House Depot had great difficulty in predicting grill sales, both by store and by month. House Depot wanted to carry these inventories in its regional warehouses, but did not want the title of the grill to pass from Weeber to House Depot until the grill was shipped from one of its regional warehouses to a specific House Depot store. At that point, House Depot would regard the grills as having been purchased from Weeber, and would pay for it in 30 days. However, House Depot would agree to take title to any grill that had been in one of its warehouses for four months, again paying for it within 30 days. Mr. Spencer estimated that on average, a grill would remain in a House Depot regional warehouse for two months. Second, House Depot wanted to sell its Genesis grills at a lower price than the name- brand grills it carried, and yet still earn approximately the same dollar gross margin on each grill sold. The rationale being that Genesis grills would take away from the sales of the name-brand grills. Thus, House Depot wanted to purchase grills from Weeber at lower prices than the wholesale price of comparable grills sold through Weeber's usual channels. Finally, House Depot wanted the Gensis grills to be somewhat different in appearance from Weeber's other grills. While the cooking system could be the same as the one used in current Weeber grill models, the main kettle and lid would need to be somewhat different and have the name Genesis molded on the side of the kettle and the wheels. Also the grills would have to be packed in boxes printed with the House Depot and Genesis names. Ms. Lester thought that these requirements might increase Weeber's purchasing inventory and production costs over and above the added costs that would be incurred for a comparable increase in volume of Weeber's regular products. On the positive side, Ms. Lester was acutely aware that the "grill boom" had flattened out, and this plus a poor economy had caused Weeber's sales to fall the past two years. As a result, Weeber currently was operating its plant at about 75% of one-shift capacity. Thus, the added volume from House Depot's purchases could possibly be very attractive. If an agreement could be reached on prices, House Depot would sign a contract guaranteeing Weeber that House Depot would buy its house-brand grills only from Weeber for a period of three years. The contract would then automatically be extended on a year-to-year basis; unless one party gave the other at least three- months' notice that it did not wish to extend the contract. Cheryl Lester realized that she needed to do some preliminary financial analysis of this proposal before having any further discussions with Tom Spencer. She had written on a pad the information she had gathered to use in her initial analysis; this information is shown in Exhibit 2. Questions to be prepared before class 1. Is the Genesis a different kind of business for Weeber? 2. In regard to the Genesis proposal: What is the additional revenue (or contribution margin)? What is the additional investment (or assets)? What is the additional cost (or carrying costs see Exhibit 2)? What is the ROI on the project? Should they do the project? 3. How does Weeber compare to the industry before and after they do Genesis? Balance Sheet Assets Cash Accounts Receivable Inventory Plant and Equipment Liabilities and Owners' Equity Accounts Payable Other Current Liabilities Short-term notes Long-term Liabilities Owner's Equity Income Statement Sales Cost of Sales Gross Margin Other Expenses Income Before Taxes Income Tax Expense Net Income Industry Performance Ratios Profit Margin Asset Turn Leverage Cash From Operations Net income Depreciation Change in Working Capital Accounts Receivable Inventory Accounts Payable Other Current Liabilities Exhibit 1 Weeber Grill Company December 31, (000) Total 2008 66 1,633 2,813 3,791 8,303 1,193 560 1,100 2,600 2.850 8,303 $11,665 8.522 3,143 2,402 741 295 446 $446 175 621 (12) (29) 230 (14) 175 796 2009 342 1,359 2,756 3,635 8,092 995 482 1,000 2,510 3,105 8,092 $10,872 8.045 2,827 2,402 425 170 255 5.0% 1.5 2.0 1. 2. 3. 4. 5. 6. Exhibit 2 Additional Data Estimated cost of producing Genesis grills using standard costs: Material Labor Overhead Total $39.80 19.60 24.50 $83.90 The overhead rate is 125% of labor based on budgeted volume of 100,000 units. It is estimated that 40% of overhead is variable. Assume labor is variable. Using the current design staff, it is estimated that three man-months of effort will be needed to design the Genesis at a cost of $5,000. It is estimated that House Depot will need 25,000 grills per year at an average selling price to House Depot of $92.30. Other incremental costs estimated on a dollar asset basis (percentage to dollar value of assets) Pretax cost of debt (interest expense) Inventory costs: Inventory Insurance Property tax on inventory Inventory handling labor and equipment Breakage and defective Total 9.0% 0.3% 0.7% 3.0% 0.5% 4.5% Over the year the estimated additional inventory is as follows: Raw Material 2 months Work-in-process 1,000 grills half completed, but all materials added 500 grills waiting to be shipped Finished Goods Assume sale of 2,083 units of the Genesis each month, for a total of 25,000 units annually. In 2009, Weeber sold 98,791 of the traditional grills. If the Genesis line is not produced, it is estimated that the traditional grill models should sell about 100,000 per year over the next three years, it is also estimated that if the Genesis model is produced, Weeber could lose some of its traditional sales. WEEBER GRILL COMPANY In September of 2010 Cheryl Lester, marketing vice president of Weeber Grills was mulling over the discussion she had the previous day with Tom Spencer, a buyer from House Depot Stores, Inc. House Depot operated a chain of home improvement and construction products and were the best-sellers of Weeber Grills. House Depot's sales had grown to the extent that it was beginning to add a "house-brand" (also called a "private label") merchandise to the product lines of several of its departments. Mr. Spencer, House Depot's buyer for outdoor living, had approached Ms. Lester about the possibility of Weeber producing the grills for House Depot. The grills would bear the name "Genesis," which House Depot planned to use for all its house-brand outdoor living. Fifty years ago, after he became frustrated with the uneven and uncontrollable flame of open brazier grilling at his Mount Prospect, Illinois home, determined backyard griller George Kempster Sr. set out to build a better grill that would protect his precious steaks from the wind and possible downpours - while sealing in a tasty smoked flavor. Kempster ingeniously cut a metal buoy in half and fashioned a dome shaped grill with a rounded lid - and the classic original Weeber kettle was born. His invention quickly gained a loyal audience and ultimately became a prominent symbol of Americana. In the 1960s and 1970s, Weeber's reputation grew beyond the Midwest, as it became a nationally known brand with distribution in retail stores all over the country - introducing covered grilling to the rest of the country. Sales were currently at an annual rate of about $10 million. (The company's 2008 and 2009 financial statements appear in Exhibit 1.) Most of Weeber's sales were through independently owned outdoor and patio furniture stores. Weeber had never before distributed its grills through department store chains of any type. Ms. Lester thought that Weeber had the image of being above average in quality and price but not a "top of the line" grill. House Depot's proposal to Weeber had features that made it quite different from Weeber's normal way of doing business. First, it was very important to House Depot to have ready access to a large inventory of grills, because House Depot had great difficulty in predicting grill sales, both by store and by month. House Depot wanted to carry these inventories in its regional warehouses, but did not want the title of the grill to pass from Weeber to House Depot until the grill was shipped from one of its regional warehouses to a specific House Depot store. At that point, House Depot would regard the grills as having been purchased from Weeber, and would pay for it in 30 days. However, House Depot would agree to take title to any grill that had been in one of its warehouses for four months, again paying for it within 30 days. Mr. Spencer estimated that on average, a grill would remain in a House Depot regional warehouse for two months. Second, House Depot wanted to sell its Genesis grills at a lower price than the name- brand grills it carried, and yet still earn approximately the same dollar gross margin on each grill sold. The rationale being that Genesis grills would take away from the sales of the name-brand grills. Thus, House Depot wanted to purchase grills from Weeber at lower prices than the wholesale price of comparable grills sold through Weeber's usual channels. Finally, House Depot wanted the Gensis grills to be somewhat different in appearance from Weeber's other grills. While the cooking system could be the same as the one used in current Weeber grill models, the main kettle and lid would need to be somewhat different and have the name Genesis molded on the side of the kettle and the wheels. Also the grills would have to be packed in boxes printed with the House Depot and Genesis names. Ms. Lester thought that these requirements might increase Weeber's purchasing inventory and production costs over and above the added costs that would be incurred for a comparable increase in volume of Weeber's regular products. On the positive side, Ms. Lester was acutely aware that the "grill boom" had flattened out, and this plus a poor economy had caused Weeber's sales to fall the past two years. As a result, Weeber currently was operating its plant at about 75% of one-shift capacity. Thus, the added volume from House Depot's purchases could possibly be very attractive. If an agreement could be reached on prices, House Depot would sign a contract guaranteeing Weeber that House Depot would buy its house-brand grills only from Weeber for a period of three years. The contract would then automatically be extended on a year-to-year basis; unless one party gave the other at least three- months' notice that it did not wish to extend the contract. Cheryl Lester realized that she needed to do some preliminary financial analysis of this proposal before having any further discussions with Tom Spencer. She had written on a pad the information she had gathered to use in her initial analysis; this information is shown in Exhibit 2. Questions to be prepared before class 1. Is the Genesis a different kind of business for Weeber? 2. In regard to the Genesis proposal: What is the additional revenue (or contribution margin)? What is the additional investment (or assets)? What is the additional cost (or carrying costs see Exhibit 2)? What is the ROI on the project? Should they do the project? 3. How does Weeber compare to the industry before and after they do Genesis? Balance Sheet Assets Cash Accounts Receivable Inventory Plant and Equipment Liabilities and Owners' Equity Accounts Payable Other Current Liabilities Short-term notes Long-term Liabilities Owner's Equity Income Statement Sales Cost of Sales Gross Margin Other Expenses Income Before Taxes Income Tax Expense Net Income Industry Performance Ratios Profit Margin Asset Turn Leverage Cash From Operations Net income Depreciation Change in Working Capital Accounts Receivable Inventory Accounts Payable Other Current Liabilities Exhibit 1 Weeber Grill Company December 31, (000) Total 2008 66 1,633 2,813 3,791 8,303 1,193 560 1,100 2,600 2.850 8,303 $11,665 8.522 3,143 2,402 741 295 446 $446 175 621 (12) (29) 230 (14) 175 796 2009 342 1,359 2,756 3,635 8,092 995 482 1,000 2,510 3,105 8,092 $10,872 8.045 2,827 2,402 425 170 255 5.0% 1.5 2.0 1. 2. 3. 4. 5. 6. Exhibit 2 Additional Data Estimated cost of producing Genesis grills using standard costs: Material Labor Overhead Total $39.80 19.60 24.50 $83.90 The overhead rate is 125% of labor based on budgeted volume of 100,000 units. It is estimated that 40% of overhead is variable. Assume labor is variable. Using the current design staff, it is estimated that three man-months of effort will be needed to design the Genesis at a cost of $5,000. It is estimated that House Depot will need 25,000 grills per year at an average selling price to House Depot of $92.30. Other incremental costs estimated on a dollar asset basis (percentage to dollar value of assets) Pretax cost of debt (interest expense) Inventory costs: Inventory Insurance Property tax on inventory Inventory handling labor and equipment Breakage and defective Total 9.0% 0.3% 0.7% 3.0% 0.5% 4.5% Over the year the estimated additional inventory is as follows: Raw Material 2 months Work-in-process 1,000 grills half completed, but all materials added 500 grills waiting to be shipped Finished Goods Assume sale of 2,083 units of the Genesis each month, for a total of 25,000 units annually. In 2009, Weeber sold 98,791 of the traditional grills. If the Genesis line is not produced, it is estimated that the traditional grill models should sell about 100,000 per year over the next three years, it is also estimated that if the Genesis model is produced, Weeber could lose some of its traditional sales.
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ANSWER 1 Yes the Genesis is a different kind of business for Weeber 2 In regard to the Genesis propo... View the full answer
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Dynamic Business Law The Essentials
ISBN: 978-0073524979
2nd edition
Authors: Nancy Kubasek, Neil Browne, Daniel Herron
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