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Guillermo Furniture

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Guillermo Furniture Store Recommendation
Team A
FIN/571
James Carlin
February 21, 2011

Abstract
Guillermo founded Guillermo’s furniture company; in Sonora, Mexico, which is gorgeous retreat location. Guillermo has been the leading furniture manufacturing company in the vicinity for numerous years. Before the later part of the 1990’s Guillermo was holding their own, until new competition arrived in the area that also made furniture. The competitors came with the latest new-fangled technology seen at the lowest prices ever for clientele. For that reason, Guillermo’s felt he’s obligated to come up with the best alternative for the company, which is to improve with technology and venture ahead or carry on working as he has for the previous years and uphold the quality product their customers have come accustom to over the years.

Guillermo Furniture Store Recommendation
Analysis and Recommend Financial Decision
The economy is weak, new competitors’ establishing a presents, Guillermo must tackle a tough decision, which is to become a furniture distributor or stay on the manufacturing side, or possibility do both. Guillermo understands that change is forth coming and he has to venture forward but the dilemma is what the best alternative is. First Guillermo must analysis the financial alternatives and establish which objective is beneficial for the company. The next step is to gather information and formulate a pro forma cash flow budget to analyze the projected earnings for the next five years for the company (University of Phoenix, 2007).
Hi-Tech Option
Guillermo established his wealth various years ago because of the low cost in labor along with an extraordinary location for manufacturing. The company’s success has held strong on those foundations until now. There are a few concerns for Guillermo that may cause the company to change the way it does business. In the University of Phoenix Guillermo simulation (2007), Guillermo is tackling three decisions: 1) The first option is to keep doing what current operations are performing which requires no changes to be made; 2) The second option is to invest in high-tech equipment and to begin manufacturing new products that will allow the company to streamline current processes; and 3) The third and final option is to become a distributor of another product line, which will offer a variety of revenue sources.
Guillermo’s management has done some research and found that their competitors are using a high tech approach providing furniture to the exact specifications at very low prices (University of Phoenix, 2007). The approach used by competitors has a high cost for its technology base. With this use, the competition has deemed the hi-tech option viable in order to reduce its labor force thus decreasing the labor cost and increasing the profitability of the company. The graph shows that production increased to 50% with no material costs increase. Direct labor impact is due to the technical skill level of operators. In comparison, by adopting the Hi-tech price option would reduce by 10% because the supply is increased.

Setup Information | | | | | | James Carlin / FIN571 | | | 0.08 | | Peso? (1=Yes) | 0 | | 1.00 | 10.814 Mexican Pesos = 1.000 US Dollars | | | | | | Income Information-Current Standards | | | | | | | Current | Hi-Tech | Broker | | Production | | | | Current Production = Sales Forecast | Mid-Grade | 2,601.00 | 3,902.00 | 3,902.00 | Production can be increased by 50% and the broker also anticipates that same level | High-End | 520.00 | 780.00 | 780.00 | Production can be increased by 50% | | | | | | Direct Materials ($)/Unit | | | | | Mid-Grade | 140.00 | 140.00 | | There are no material costs for brokered units | High-End | 250.00 | 250.00 | 250.00 | | | | | | | Direct Labor ($/HR)/Unit | 15.00 | 40.00 | 40.00 | The labor rate is increased due to the technical skill level of operators | | | | | | Labor Time (Hrs)/Unit | | | | | Mid-Grade | 20.00 | 4.00 | | There are no labor times for brokered units and production times are 20% of original times | High-End | 30.00 | 4.00 | 4.00 | Production times are now equal to the mid-grade level | | | | | | Direct Cost/Unit | | | | | Mid-Grade | 440.00 | 300.00 | 360.00 | The Broker cost for Mid-Grade is based on net FOB destination including shipping/tariffs | High-End | 700.00 | 410.00 | 410.00 | | | | | | | Price/Unit | | | | | Mid-Grade | 509.00 | 459.00 | 459.00 | Prices are reduced by 10% because supply is increased | High-End | 879.00 | 789.00 | 789.00 | Prices are reduced by 10% because supply is increased | | | | | | Plant Overhead/Yr | | | | | Salaries | 50,000 | 95,000 | 95,000 | Need to add a 45,000 a year maintenance position for the equipment | Utilities | 9,000 | 27,000 | 4,498 | Utilities are expected to be 3 x's current at full production (150% above current levels) based on units produced | Benefits | 106,430 | 84,412 | 21,980 | Benefits are 10% of all wages (including direct labor) | Insurance | 3,000 | 15,000 | 15,000 | Insurance will increase by 12,000 with the addition of the equipment and building expansion | Property Taxes | 975 | 3,900 | 3,900 | Property taxes are 6.5%, assessment is 1% of original value, and that is on all plant/equipment | Depreciation | 50,000 | 466,667 | 466,667 | Buildings are at 30 years and Equipment is at 10 years, straight line | Supplies | 6,000 | 6,000 | 6,000 | Supply expense is miscellaneous and does not vary | | | | | | Income Tax Expense | 19,800 | 91,585 | 28,927 | Taxes are 42% of Net Income | | | | | | | 272,549 | 916,038 | 681,918 | Net Margins | | 225,405 | 697,979 | 613,045 | Overhead | | 47,144 | 218,059 | 68,873 | Net Income before taxes | | | | | |

Foreign Competition and Labor Costs Recommendations
The Guillermo Furniture Store began to notice a significant shift in the market during the 1990’s as labor costs increased and overseas competitors entered the market. Guillermo is currently losing ground to overseas competition using high-tech approaches to manufacturing furniture. The object for Guillermo is to find another source of income instead of manufacturing. Guillermo has realized that in a manufacturing economy, organizations must continuously make improvements to the production processes in order to remain competitive and relevant. Technological advances in the market have developed to the point where furniture is cut to exact specifications at low costs. Market changes demand Guillermo update his factory with high-tech equipment to remain competitive and relevant.
Moving the company in the direction of hi-technology will allow significant growth for the company, and will allow the company to be adept to future technology. High level of technology always allows a company to do more with less and there will be no different out-come with Guillermo. With the hi-tech option, Guillermo will see a significant incurred cost increase even after the initial cost of net assets. A significant advantage over other options the company is facing. These options would require additional capital investment and strategic planning with the business ventures.
Unlike the hi-tech option, the other business ventures would need to address various broker options and relationships, brand name, and an in-depth risk analysis with each broker option. If Guillermo were to pursue this option, Team A feels that it will take the company further away from the nature of the business that made Guillermo what it is today. Change in any context can be difficult, but as difficult as it may be for individuals to change, corporate change is exponentially more so. Part of the reason why so few corporate change initiatives fail is that people often miss this crucial point. Bracing themselves for what lies ahead, they assemble the resources - the time, money, and effort - that would be appropriate to implement a abundance of individual changes.
One way that would allow a smoother transition within the company is for Guillermo and his upper management team to sell the future of the company and the impact of hi-tech to the employees. The strategy involved in switching from manufacturing to distribution involves Guillermo’s current distributor networks. Guillermo could coordinate his existing distributor network and become a representative for another manufacturer. An analysis of Guillermo’s Furniture Store shows a conversion to the high-tech approach which results in an increase in items such as direct labor costs, salaries, production, utilities, insurance, depreciation, property taxes, and income tax expenses. In addition, a conversion to a high-tech approach will result in decreased labor time, direct costs, price per unit, and benefits. Results from the analysis show that a high-tech approach is the most cost efficient and effective means of sustaining the furniture store. Production alone can see tremendous increases while reducing the price per unit.
Recommendation Justification
The recommendation made is that Guillermo should go with the high tech upgrade to his facility in order to keep the business profitable. He has shown that through the numbers and upgrades, he will then be able to beat out his competition. Combining his furniture innovations of coating, with the hi-tech upgrades, he will then be able to edge out his competition in all forms.
Financial Justification
Guillermo has shown that in the short term there will have to be more money spent to gain the upgrades. However, this also increases production and lowers the cost of production with labor. This directly contributes to the long-term weighted average cost of capital. With the money that he will gain in profits, he can invest long-term in higher yield equity bonds that would not have as much risk involved (Emery, Finnerty, and Stowe. 2007). This will then bring down the cost of his debts by offsetting the amount of interest that he will earn in the said investments. Also by moving towards hi-tech innovations, he will be increasing the worth of his company for the potential investors as well. Guillermo would make his company a worthwhile investment because he can point to the new hi-tech innovations that will help keep the company relevant well into the future. As stated from the Economist on how new businesses must adapt to survive, “there are few unique technologies any more. Increasingly, the knowledge needed in a given industry comes out of some totally different technology with which, very often, the people in the industry are unfamiliar” (Barnes, Bowers, Langvardt, Mallor, 2003 Ch. 43, pg. 10-20, para. 2-6). What this means is that now more than ever, Guillermo’s ideas for the new way to produce furniture gives him a huge advantage that few enjoy. Therefore, the analysis would show that Guillermo operating on these assumptions would have to allow that retooling combined with the new patent would allow for greater long-term worth in his company, as he is taking on a new investment that would provide for the lon-term.
Long Term Growth
As stated earlier, the potential for long-term growth is really, what the new upgrades afford. A company is only as good as it looks for the future, even if there are more short-term sacrifices that it must make. Companies must always make sure that the long-term outlook looks attractive for investors so that it can raise capital in the short-term to help pay for the upgrades. Guillermo must put in the necessary upgrades as soon as possible to make his business a viable investment option for long-term investments, thus creating himself some reliable capital (Emery, Finnerty, Stowe. 2007). The long-term potential of Guillermo’s business is one that will be bright when the overhaul of the company increases production, decreases labor costs, and effectively makes Guillermo the only furniture business in which there is any value. He will have cornered the market on the innovation in furniture for the time to come, with the added capital and his advantage will then keep increasing making for a great long-term outlook.
Five-year Pro Forma Cash Flow Budget
Guillermo’s current and future cash flow situation is another factor. Guillermo’s purchasing equipment will require either using the cash on hand or finance the purchase over a period of time, in which the store will make payments to a lender. Leasing does not generally require upfront down payments or deposits, which often makes a lease attractive for some businesses since this approach can help conserve capital (Emery, Finnerty, and Stowe. 2007). Periodic payments for a loan or lease generally differ making one approach possibly more attractive, from a cash flow standpoint view than the preceding one. With the outlay of cash needed to purchase an asset, Guillermo needs to consider what expected return to receive on the money compared to the return the store expects to receive of the money invested in other investments.
Another factor that can lead to a poor situation is the unanticipated costs at the end of the lease due to lost, damaged, or overused equipment. In addition, the poor negotiation of lease terms or trade off in the lease and buying situation of the interest rate on borrowing money. Guillermo should know that if interest rates are high the monthly payments may be attractive compared to loan repayment money. In accordance with the budget section provided with this scenario, the budget sales forecast anticipated 3% over six months. The sales forecasted for twelve months, anticipated to increase 6% each year for five years.
Team A took this information and using the Pro Forma Cash Flow Budget, estimated a five-year plan. In the event of this situation, Guillermo should buy the new equipment to reduce the costs of labor and benefits. However, the equipment obtains a high start up cost; this would be the best profitable opportunity for the future of the company. This will enable Guillermo to stand firm at the atmosphere of the furniture industry and make quick changes to enable a firm stand competitive with other competitors and use some marketing strategies to promote his company.
Graph of 5 year plan [pic] - LaCresha
Conclusion
Guillermo’s Furniture Company is currently exploring options to continue making furniture, and selling it to the public, all the while making profits for the company. The answer to Guillermo’s future, points towards hi-tech advancement. This option would give Guillermo the option that provides the least risk while yielding a high return. The sensitivity analysis and what if scenarios to consider, along with the weighted average cost of capital (WACC) completely solidified our decision to recommend this course of business venture. With the information contained, Guillermo’s’ given enough information to assist them in making a sound business decisions whenever they decide to take the company into the high-tech venture.

References:
Barnes, J., Bowers, T.L., Langvardt, A.W., Mallor, J.P. (2003). Business law: the ethical, global and e-commerce environment. (12ed) (Ch. 43, pg. 10-20, para. 2-6) New York: McGraw-Hill/Irwin.

Emery, Finnerty, Stowe. (2007). Corporate Financial Management (3rd ed.). New Jersey: Pearson-Prentice Hall.
University of Phoenix. (2008). Guillermo's furniture store scenario. Retrieved from University of Phoenix, Simulation, FIN571 website.

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Guillermo Furniture Store

...Abstract Guillermo’s Furniture Manufacturing Company is in Sonora, Mexico in a gorgeous vacation spot. Guillermo’s is the largest furniture store in the area and made furniture for years, until the late 1990s that a new competitors joined the furniture business that has put a dent into Guillermo’s business. Competitors have new technology when to allow them to come in with lower prices and lure customers but Guillermo has to decide on the best options for the company either upgrade or move forward working as he did making quality products for customer’s expectation. In order for Guillermo to improve his company, Guillermo has to seek other alternatives and make financial decisions to increase sales to make profits. The contents of the paper will examining Sensitivity Analysis, Weighted Average Cost of Capital (WACC), multiple valuation techniques in reducing risks, calculate NPV for future cash flows and work out pro forma cash flow budget for the next five years for the organization and analyze the companies projected earnings (UOP, 2009). Analysis of Different Alternatives Guillermo has three available alternatives to evaluate the furniture store. First alternative is to keep itself in the current position. The current managers use capital budgeting techniques to find the best project among the group of projects. Current budget for Guillermo is $42,577 net income before taxes could observe capital markets for just a short time to convince consumer......

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