Morrissey Forgings, Inc Essay
In early 1986, Tim Morrissey reviewed the disappointment at the company’s operating results in 1985 (see Exhibit 1). Business established in 1938 by Tim’s grandfather as a modernization of a scrap metal company, had been built earlier by the great-Team since 1902. The Company entered the business Stove (stove) when this product is sold in the market in the early 1970s. In the year 1977 only use the stove heating product line. Business which operated outside the factory and office space rental in Bridgewater, Vermont which is believed by his family as a factory owner.
Business is run very well until the year 1980, with market power for heating source environment in sensitive areas of New Zealand where the company operates. Stove sales in 1983 were $ 9,000,000, – to 30 000 units. But in the year 1985 stove sales decreased by more than 30 competitors, industry leading technology, the market decline, the price level is high, and strong competition. In mid 1980, it was felt that the ‘Wood Stove’ has environmental problems (air pollution), surpassing the solution about the environment. EPA Act concerned with this industry.
Associated with declining profits, lower unit sales and a large industrial capacity, MFI introduced a
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The Company together with dealers and customers advertising and sales promotion (6% of sales), but the marketing sales by dealers has been there from the 6th place of the branch sales in 1983 up to 12th place in 1985, divided into two areas. When the product oven plus, Morrissey does not menggharapkan high penetration dealer immediately, so he expanded sales of as much as possible. Stoves that sold more in the ‘core’ area (northern New York and six New England states) in the six branches and an area sales manager.
Morrissey had to negotiate the sales outlet for the oven more than of the Northeast, from Maine to Chicago, St. Louis, and Virginia. In 1985 he added six sales regions and an area sales manager who works outside the core area. Marketing procurement ovens also require new investments in advertising, dealer promotions, dealer discounts, and sales incentives. Total cost of sales in 1985 were $ 3,125,000 including $ 870,000 for advertising and promotions (6% of sales) and $ 2,255,000 for booking fees. MFI sells 10 000 ovens in 1984 and 20 000 ovens in 1985 (5000 in the core area).
Year 1985 show 80% the number of stoves sold. Competition is still a small oven at that time. MFI sells only slightly outside the core area of the stove because Morrissey was reluctant to press the lower product margins through higher marketing costs. Freight cost is also a problem when extending the distance of delivery. Both the oven and stove products each weighs 300 pounds. MFI has a convoy of trucks has been expanded from five to 10 trucks from the addition of an oven products into the business.
Although the convoy requires investment of approximately $ 2,000,000, orders shipping in trucks owned by the company it is not economical. But more than half of all shipments using ordinary transportation. Consider regulatory management, delivery, cost convoy, freight costs, rental costs for the warehouse and the buyer, then the total cost of delivery is approximately 17% of sales in 1985. When Tim Morrissey saw the results of operations in 1985, he met the chief accountant in the office, Caroline Cooper, and asked him about how he should divide operations between the stove and oven.
Losses on the stove is not surprising for Morrisey, but he was not sure how Cooper determine the costs and revenues. Cooper said that he had made the correct statement. “This is not a complex industrial operations as you know. Sales are calculated based on the sales invoice. Manufacturing cost is also true, where the direct product costs exceed 54% of the total. Cost of materials and labor from the average cost records accurate. General overhead which is considered fixed, amount to $ 2,520,000 in the previous year.
Depreciation amounted to $ 800,000. ental costs $ 550,000. factory cost of $ 1,170,000. I consider three such costs are the costs used in the entire production, so in the basic units produced. Variable overhead amounted to $ 1,100,000 and is also based on the unit. You might assume that a small overhead allocation “Cooper continued” But not much. When we make a stove, there’s no doubt about the allocation of the product line. I recommend that you use the allocation based on labor, but the difference is not large. Oven will require more time to manufacture, but we will make fewer number of ovens.
Cooper gives a summary of the manufacturing costs to Morrissey for this year (see Exhibit 2). Cooper continued the explanation, “the allocation of non-manufacturing costs are always more subjective, but this way seems to be trustworthy. Stove more than the total volume in units and dollars, but the oven is higher in the sales and distribution. Stove is basic business, the oven is incremental, a new business. Therefore, I decided to member sales price and delivery based on the percent of sales from both products. Then I divided million of general expenses between the two line on the number of sales.
General expenses remained unchanged for several years. We see that the second line of products provide a positive contribution to earnings. I do not recommend the allocation of SG & A “. Stove marketing is very competitive, so it does not provide earnings despite its best efforts. Morrissey called the Vice President of Sales (Sales Vice President), George Murphy, to tell him that Morrissey still producing stove. Murphy knows the financial results in 1985 and did not like the stove business. “Since the budget sales and shipments made in 1983, many new consumers who use them.
We still have a ways to increase production on the product oven, and I bepikir that that we can sell 30 000 in the oven this year, if we focus on one product and maintaining prices. “One more thing, the average order is 10 units of the stove, while the average order is two units of the oven only. We write the previous year 7500 sales orders outside the core area and 5,000 orders in the core area (2500 to 2500 for the stove and oven). Us more to sell and distribute outside the oven stoves in New England than New England, but I know the oven is very high price. And we’re still learning the business. “