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Guillermo Furniture Store Recommendation


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Guillermo Furniture Store Recommendation

Introduction Guillermo Navallez has for many years operated from Sonara, a city in Mexico making furniture. One of the main reasons for maintaining his operations in this location has been the good supply of quality timber. However, a new competitor entered the market offering the same quality products at a fraction of the price Guillermo was charging. This was possible because of the heavy reliance on high-tech mechanization that the new supplier employed. To further complicate things for Guillermo was the entry into the city of a large retailer, a sudden explosion of workers resulting in a substantial increase in the cost of labor. All things had a negative effect on Guillermo’s bottom line.
The essence of any business operation is to maximize profits. This is only achieved when the business is able to meet its recurring costs and have a surplus available for reinvestment or payment as dividends to the owners. Guillermo’s case requires a critical investigation into the business operations to determine available to him. Given the current situation, Guillermo has three very viable options to consider. He could either maintain the present business model and continue operations as currently constituted, or adopt a new business model by embracing high technology and thus investing in highly automated machines similar to what the competitor is using or change his operations and instead become a broker to one of the big competitors who is looking for an entry point into the North American market. In business, a sensitivity analysis is a business interrogative technique that allows one to change certain variables affecting a business in order to determine how the business will be in the long run. This is especially important as it determines the specific factors that affect the operations of a business positively and which will ultimately contribute significantly to the success of a business (Saltelli, Chan & Scott, 2009). Thus Guillermo’s business operation will have to undergo a sensitivity analysis to determine the best way forward out of the current situation.
The current business and operations model Guillermo currently runs a business and operations model that is focused on manual labor to produce both med-grade and high-end pieces of furniture. On average, it costs Guillermo $15 for labor per hour with each piece of furniture taking up 20 hours for the mid-grade and 30 hours for the high-end. The current building has been used for almost 13 years, and all the equipment is fully depreciated during those years, which helped the company to build some equity. After conducting sensitivity analysis on this alternative, the results reflects the impact of the demand on the company revenue and margins which is presented in table 1.
Table 1
Sensitivity analyses for Mid-grade in the current setup QTY Income before taxes Difference in income per 150 units
1000 (17,171.00) 5,850.00
1150 (11,321.00)
1300 (5,471.00)
1450 379.00
1600 6,229.00
1750 12,079.00
1900 17,929.00
2050 23,779.00
2200 29,629.00
2350 35,479.00
2500 41,329.00
2532 42,577.00

The sensitivity analysis on the current setup indicates that Mr. Guillermo has to sell at least 1441 units from the mid-grade with the corresponding amount ration from the high-end product to break even and start making profits. The last column on the right in table 1 shows is the difference in income based on 150 units increase or decrease.
The High-Tech setup A second alternative to Mr. Guillermo is to invest in new high-tech machines. The new investment will enable Guillermo to produce the same products with same quality and specification. The new machines have the more capabilities and advantages than the human labor; with the new machine the Guillermo store will be saving on the labor. Furthermore, the production capacity can meet any sudden increase in the demand in any of the products line, and not like human the machines can runs on a 24-hour basis, and the computer control the laser lathe to produce the exact cuts in the wood, and the assembly function, which can save also on the waste of materials, . On the other side he will be paying a high salary for the operators as well as the maintenance for those machines. Table 2 shows the sensitivity analysis for the high-tech setup.
Table 2
Sensitivity analyses for Mid-grade in the High-Tech setup QTY Income before taxes Difference in income per 150 units
2,150 (40,099.67) 21,450.00
2,300 (18,649.67)
2,450 2,800.33
2,600 24,250.33
2,750 45,700.33
2,900 67,150.33
3,050 88,600.33
3,200 110,050.33
3,350 131,500.33
3,500 152,950.33
3,650 174,400.33
3,798 195,564.33

As a result of the analysis Mr. Guillermo has to sell about 2431 units from the mid-grade with the corresponding ratio amount from the high-end product to cover his fixed and overhead expenses. In this setup the difference per 150 units is more than three times the difference per 150 units in the current setup. This setup will hold a high risk value in such case the demand is low for the product, and could burden the company’s cash flow, but the opportunity cost for the high revenue has a considerable weight.
The Broker setup Mr. Guillermo seeing that his margins start to shrink as a result of the rising cost of labor for both setups the current and the high-tech one. After doing some research on the competition in the market, and how they are handling these changes, Mr. Guillermo found that many of them are consolidating into larger organizations, and in third alternative, he is planning to move his company from manufacturing to primarily distribution. Guillermo will be distributing the same products manufactured by one of the biggest companies in Norway, and take an advantage of the need of the foreign company for a distribution channel in North America. Table 3 shows the sensitivity analysis to a setup where the company is working as a broker.
Sensitivity analyses for Mid-grade in the Broker setup QTY Income before taxes Difference in income per 150 units
100 (11,669.37) 14,850.00
250 3,180.63
400 18,030.63
550 32,880.63
700 47,730.63
850 62,580.63
1,000 77,430.63
1,150 92,280.63
1,300 107,130.63
1,450 121,980.63
1,600 136,830.63
3,798 354,432.63

As the results reflect in table 3, in this setup Mr. Guillermo has to sell about 218 from the mid-grade with the corresponding amount ratio from the high-end to break even which considered to be a very good option especially on those times when there is a slow down in the market. Moreover, the difference per 150 units is still higher than the current setup, which makes this option the best among all the previous alternatives. Many other factors can affect the decisions managers take, and one of those factors is the company’s capital structure. Companies need capital to grow and invest in its business. This capital comes from equity and debt sources, which represent the components of the capital. One of the major factors within the capital structure is the cost associated with the capital components which determine the company’s value. “The cost of capital is the return required by a group of investors to take on the risk of the capital market environment, each investor will require a fair return for the amount of risk borne” (Emery, Finnerty, & Stowe, 2007) which means that Mr. Guillermo can use the cost of capital to compare the profitability of each of his alternatives especially on the second setup where an expensive equipment is in the formula.

Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate financial management, 3rd Ed., Pearson-Prentice Hall, Hoboken, NJ.
Saltelli, A., Chan, K & Scott, E.M (2009). Sensitivity Analysis, John Wiley & Sons, Mason, OH.

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