team d week 6

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Running head: GUILLERMO FURNITURE STORE RECOMMENDATION 1

Guillermo Furniture Store Recommendation

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GUILLERMO FURNITURE STORE RECOMMENDATION 2

Introduction

Guillermo Navellez, owner of the largest prosperous furniture store in Sonora, Mexico is

encountering globalization and the development of foreign competition. Economical labor and

the multitude of timber in Sonora are key influences, which contributed to the manufacturing of

the stores furniture. Guillermo faces new competition that possesses innovative technology

with the aptitude to manufacture faster and at lower expenses. With the development of this

refined technology, it is a necessity that the company implements a plan of action to terminate

decreasing revenue and sales (University of Phoenix, 2013). The purpose of this essay is to

examine the current business forecast and decide upon a strategy that would optimize working

capital. The essay will also include an efficient pro forma budget and a recommended

implementation plan.

Current Alternative

An alternative for Guillermo is to stay with the current situation by selling his own

furniture but to combat the increasing costs of labor consider moving from his current location to

another location within Mexico that has a lower labor cost. In this alternative scenario he would

sell his existing buildings and equipment and move to a lower cost building within in a lower

economy that will allow for the hiring of less expensive labor. By moving he will lower his

overall costs which will allow Guillermo to use the increased revenue to escalate the marketing

strategy to global distributors. To combat the moving to a lower economic location which can

impact his sales, distributing his furniture to other countries allows for his products to be

available to more consumers, increasing his chances at increased sales. This alternative also

allows for Guillermo to explore the possibility of acquiring new technology to cut down on long

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term cost. The negatives in selecting this alternative is it would not facilitate his current situation

with his family. Taking the time to identifying where to locate the new facility, open the facility,

identify distributors, and the time it would take to build a client base will take a toll on his ability

to spend time with his family. However, if the business does take off, and the global market

embraces his products, he will be very successful in that his labor cost is low and he can expand

to the use of new technology to increase his product volume and therefore increase his sales.

Hi-Tech Alternative

There are two alternatives included for Guillermo in regards to implementing new

technology; 1)is acquiring new technological equipment that will run 24 hours a day

manufacturing the furniture, and 2) is the flame retardant spray that he has developed. Guillermo

can take advantage of the lower cost of manufacturing by implementing new technology that

runs 24 hours a day with little to no labor. Initially, Guillermo will have to invest money into the

purchasing of new expensive equipment, but in the long run the use of the new technology will

decrease his labor costs, increase his production and allow him to offer the products at a

competitive price. This gives Guillermo a competitive advantage that he does not currently have.

The use of the new technology will also allow him to spend more time with his family seeing he

will not have to manage a large workforce. Incorporating the invention of his flame retardant will

also allow Guillermo to be more competitive. Offering a specialized product will appeal to

consumers, usage of the new technology will keep costs down and offer up more time for

Guillermo. But the cost will impact him and he will have a period of time recouping from his

investment financially.

Broker/Distributor

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Guillermo benefits as a partner with Norway Company. Essentially Guillermo can be the

most important representative in North America after partnership with Norwegian Company.

Navallez can take advantage and coordinate his developed distributor market network. In a

rapidly growing industry, Guillermo business finances will increase without dealing with the

complications and concerns involved in creating a new business product to market. Reminder

Guillermo never wanted to take over or acquire a company nor for someone to acquire his

(University of Phoenix, 2013). With this he will only work with another company because they

would be partners working peacefully. Each one will have a benefit by working with each other

rather than competing. The company had been looking for opportunities to distribute in North

American and Guillermo is looking to stay and business and gain a profit. Guillermo has existing

distributor network that can benefit in the coordination of the companies. Norway is a opposing

company who had the modern technology for constructing the furniture at a very low rate, yet

with finer detail, speed and accuracy that can benefit both companies. Guillermo can retain

some of the high-end custom work required by their customers and raise their revenue by

extending a hand.

Recommendation

A recommendation must be solid and prove to be flawless. It must also demonstrate that

the company has an understanding of the outcome of the decision that may transpire now and in

the forthcoming of the company. Consequently, validations of the recommendation must existent

and offer the vital facts of the comprehensive monetary construction of Guillermos furniture

store.

Guillermo has three alternatives to choose from to make a profitable decision for his

company. Of the three alternative: current, hi-tech, or broker, the clear choose is becoming a

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broker or distributor (University of Phoenix, 2013). Becoming a broker or distributor for the

Norway business, helps eliminate the possible second competitor for Guillermo. It will be very

beneficial for both of these companies to work together. The manufacturing costs have gone up

with increasing labor costs from improving economy around him so Guillermo furniture can take

advantage of the low cost labor from Norway. With the low cost from Norway, Guillermo can

take advantage and sell furniture at a lower price since he will now be a distributor. Each

company brings their customers together and adding new customers with the merger, it will

increase the performance profits and the operation costs will reduce. More products can be sold

in the market rather than inventing new ideas to compete with other companies in the industry.

The reduction of costs will be great because the initial cost needed to purchase new equipment is

no longer needed.

The business focus is sharpen by diversifying. Diversification of the business allows

Guillermo Furniture Store to reach their goal of becoming the distributor of the Norwegian

company in the region. This allows profits to be shared by both companies. This allows both

companies to control pricing and elimination of competition.

Competition will make the company sell at a low price and lose money because we lose

control of what is sold in the market. With Guillermo Furniture Store working as a broker for

Norway, it allows both companies to have control over mass production.

Justification

Guillermo Navallez can use the financial information to make pertinent business

decisions; even though some information contains limitations. This will allow Navallez to create

a new operating structure, if needed, which will allow his business to turn a profit. There are

many items to take into consideration when comparing prices, assets, dividends, earnings, and

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liabilities. Financial information has changed over time so that is something Navallez must

remember.

The decision will be driven by the differing costs. In this case, the business has the

capability to require a merger and assist Guillermo Furniture maintain its independence.

Working with a potential competitor, will result in high future earnings for both parties.

Pro Forma Analysis

BUDGET

Budget Data

UnitsBudgeted $ Budgeted Units Actual

Production

Mid-Grade2,613 2,800

High-End523 400

Direct Materials($)/Unit

Mid-Grade140.00

High-End250.00

Direct Labor($/HR)/Unit

15.00

Labor Time (Hrs)/Unit

Mid-Grade20.00 21.50

High-End30.00 28.00

Direct Cost/Unit

Mid-Grade440.00

High-End700.00

Price/Unit

Mid-Grade509.00

High-End879.00

Plant Overhead/Yr

Salaries 50,000Utilities

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9,000

Benefits 10%

Insurance 3,000

Property Taxes 975

Depreciation 50,000

Supplies 6,000

Income Tax Expense 42.00% -

Variance Analysis -June

UnitsBudgeted $ Budgeted Units Actual $ Budget-Flex $ Actual Var-Flex

Var-Gross

Revenue

High-End523 459,717 421 370,059 351,556 (18,503)

(108,161)

Mid-Grade2,613 1,330,017 2,787 1,418,583 1,418,583 - 88,566

Total Revenue 1,789,734 1,788,642 1,770,139 (18,503)(19,595)

Cost of Goods

High-End 130,750 225.00 105,250 94,725 10,525 36,025

Mid-Grade 365,820 142.25 390,180 396,451 (6,271)(30,631)

Total Cost of Goods 496,570 495,430 491,176 4,254 5,394

Net Revenue 1,293,164 1,293,212 1,278,963 (14,249)(14,201)

Labor Wages 1,019,250 15.02 1,025,550 1,077,222 (51,672)(57,972)

Office Salaries 50,000 50,000 52,500 (2,500)(2,500)

Benefits 106,925 107,555 112,972 (5,417)(6,047)

Supplies 6,000 6,000 597525 25

Utilities 9,000 9,000 9100(100)

(100)

Insurance 3,000 3,000 3000 - -

Property Taxes 975 975 975 - -Total Operating

Expense 1,195,150 1,202,080 1,261,745 (59,665)

(66,595)

Earnings before Taxes& Depr 98,014 91,132 17,219 (73,913)

(80,795)

Deprecition 50,000 50,000 50,000 - -

Earnings before Taxes 48,014 41,132 (32,781)(73,913)

(80,795)

Income Taxes 20,166 17,275 (13,768)31,044 33,934

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Net Earnings 27,848 23,857 (19,013)(42,870)

(46,861)

Sales Forecast

Budget=> January February March April May June

High-End 467 477 487 497 507523

Mid-Grade 2458 2483 2508 2533 25592,613

Actual=>

High-End 470 456 442 429 416 421

Mid-Grade 2460 2522 2585 2650 2716 2787

PRODUCTION FOR MARCH

Direct Cost Total Wood Materials FoamChem

AChem

BChem

C

Flame Retardent (per liter)10.00 1.50 0.50

Coating (per liter)25.00 7.50 2.50 15.00

Mid-Grade (per unit)140.00 80.00 40.00 20.00

High-End (per unit)250.00 160.00 60.00 30.00

Alternative Coating (per liter)27.50

Market Price of Flame Retardent (perliter)

10.00

Liters of Flame retardent per year63

Liters of Coating per year314

Plant Capacity

Flame Retardent

188

Coating470

Mid-Grade5,226

High-End1,046

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5 YEAR CASH FLOW

Project cash flow with current option

Y1 Y2 Y3 Y4 Y5

Total Cash Inflows $1,789,734 $1,789,734 $1,789,734 $1,789,734 $1,789,734

Cash Outflows (Expenses):

Insurance $3,000 $3,000 $3,000 $3,000 $3,000

Direct material $496,570 $496,570 $496,570 $496,570 $496,570

Payroll $1,176,175 $1,176,175 $1,176,175 $1,176,175 $1,176,175

Supplies $6,000 $6,000 $6,000 $6,000 $6,000

Taxes & Licenses $975 $975 $975 $975 $975

Utilities & Telephone $9,000 $9,000 $9,000 $9,000 $9,000

Income taxes $20,166 $20,166 $20,166 $20,166 $20,166

total outflows $1,711,886 $1,711,886 $1,711,886 $1,711,886 $1,711,886

Cash surplus $77,848 $77,848 $77,848 $77,848 $77,848

Projected cash flow with high tech

optionY1 Y2 Y3 Y4 Y5

Total Cash Inflows $2,418,645 $2,418,645 $2,418,645 $2,418,645 $2,418,645


Insurance $15,000 $15,000 $15,000 $15,000 $15,000

Direct material $745,050 $745,050 $745,050 $745,050 $745,050

Payroll $932,580 $932,580 $932,580 $932,580 $932,580

Supplies $6,000 $6,000 $6,000 $6,000 $6,000

Taxes & Licenses $3,900 $3,900 $3,900 $3,900 $3,900


Income tax 93,428 93,428 93,428 93,428 93,428

total outflows $1,822,958 $1,822,958 $1,822,958 $1,822,958 $1,822,958

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Cash surplus $595,687 $595,687 $595,687 $595,687 $595,687

Projected cash flow with high tech &broker option

Y1 Y2 Y3 Y4 2013Total Cash Inflows $2,418,645 $2,418,645 $2,418,645 $2,418,645 $2,418,645


Insurance $15,000 $15,000 $15,000 $15,000 $15,000

Direct material $196,250 $196,250 $196,250 $196,250 $196,250

Cost of broker $1,411,200 $1,411,200 $1,411,200 $1,411,200 $1,411,200

Payroll $242,660 $242,660 $242,660 $242,660 $242,660

Supplies $6,000 $6,000 $6,000 $6,000 $6,000

Taxes & Licenses $3,900 $3,900 $3,900 $3,900 $3,900


Income taxes $30,435 $30,435 $30,435 $30,435 $30,435

total outflows $1,909,950 $1,909,950 $1,909,950 $1,909,950 $1,909,950

Cash surplus $508,695 $508,695 $508,695 $508,695 $508,695

Conclusion

To conclude, the pro-forma budget submitted for Guillermo Furniture entails recurrent

modifications grounded upon the existing financial information and economic outlook for the

furniture industry. A monthly update will keep the forecasts as close to accurate as imaginable.

Due to an unbalanced economy and indecisive interest rates, it is strongly recommended that

Guillermo become a broker or distributor for the Norway business. This will prove to be

beneficial to all parties by increasing revenue and profit. This decision was based on the the fact

of Guillermo needing to build revenue, profits, increase shareholders wealth, and improve

credibility through credit analysis before applying the aggressive approach.

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References

University of Phoenix. (2013). Guillermo Furniture Store Scenario. Retrieved from

http://ecampus.phoenix.edu

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