Sales income
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THE FILMORE FURNITURE COMPANY
Over the past few years, Mr. John Filmore, owner of the Filmore Furniture Company, has
grown increasingly concerned over the performance of the company’s chairs division,
which is located near Pete
orough, Ontario. The company is well-established and enjoys
a good reputation and good relationships with its retailers. However, sales of the
company’s chairs in 2018 were no higher than three years earlier, and profits have
declined by nearly 24%, from $340,000 in 2015 to $260,000 in 2018, as the following
comparative income statements show.
FILMORE FURNITURE COMPANY
CHAIRS DIVISION
INCOME STATEMENT
($ thousands)
XXXXXXXXXX XXXXXXXXXX
Revenues $3,600 $3,620 $3,630 $3,610
Cost of Goods Sold:
Opening inventory XXXXXXXXXX XXXXXXXXXX
Materials 1, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,290
Labour 1, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,380
- Closing inventory XXXXXXXXXX XXXXXXXXXX
2, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,610
Gross profit 1, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,000
Fixed Expenses:
Salaries XXXXXXXXXX XXXXXXXXXX
Marketing XXXXXXXXXX XXXXXXXXXX
General & Admin XXXXXXXXXX XXXXXXXXXX
Total XXXXXXXXXX XXXXXXXXXX740
Operating Profit XXXXXXXXXX XXXXXXXXXX
Note: all financial statements presented in this case are included in the EXCEL file “Case
5 - Filmore excel sheet (2019)”
The Industry and Economic Environment
In the early 1990s, the Canadian furniture industry suffered from a combination of
economic recession and growing import competition. After 1994, conditions improved as
the economy recovered and the decline in the Canadian dollar made imports more
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expensive. Nonetheless, through the 2000’s sales growth in general has been relatively
slow (3% to 5% annually), and competition from both domestic and foreign producers
very strong. Several Canadian furniture manufacturers closed, while others had used the
eathing space provided by the low Canadian dollar to reposition themselves in the
market and to improve efficiency in preparation for the increased competition that is
expected in the future.
Then the 2016 election of Donald Trump as President of the United States plunged the
industry into uncertainty again. Trump had stated that protection of jobs in the US
furniture industry was a priority. The renegotiation of the free trade agreement among
Canada, Mexico, and the US was also causing concern in the Canadian industry. Finally,
in a desperate ploy for re-election, the Ontario Liberals had increased the minimum wage
y 30%, from $11.60 to $15.00 per hour. Since approximately one-third of Filmore’s
workers earned the minimum wage, this had an adverse impact on the Company’s labour
expenses.
The Chair Division
The Pete
orough plant of Filmore Furniture has a skilled work force that is quite loyal to
the company, mainly because it provides reasonably steady employment in an area where
much employment is seasonal and unemployment is high. The plant produces three basic
models of chairs, in a variety of colours, finishes and fa
ics.
The “Filmore” model is one of the company’s original designs, a standard model that has
always sold reasonably well, and remained the Division’s second best-selling chair. The
market for this type of chair has been growing slowly but steadily in recent years, and
while no “official” market share statistics exist, Filmore’s sales representatives report that
the company appears to be holding onto its share of this market. As a result, sales of the
“Filmore” have been rising slowly but steadily. Due to the design of the “Filmore”, its
production involves an above-average amount of labour.
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The “Caledonia” model is a more modern design of a type that has sold very well in
ecent years.. In this
iskly-growing market, Filmore Furniture has done unexpectedly
well, obtaining a growing share of the market even in the face of competition from
IKEA’s popular “Sundin” model. In fact, sales have been so
isk that on several
occasions, the “Caledonia” has been on backorder, and retailers have had to wait several
weeks for deliveries. Production of the “Caledonia” requires less labour than the other
models, primarily due to the use of modern wood-forming machines that the company
imported from Norway in the early 2000s, at a cost of $250,000. The plant foreman and
woodworkers agree that this equipment could be modified to use in the production of the
“Filmore” model; however, this has not been done. The company has needed all the
machines it has for production of the “Caledonia” chair, and its declining profits and
heavy debt load have made management reluctant to spend on more equipment or on
expansion of the plant. In fact, John Filmore had stated that no capital investment could
e made unless its payback period was two years or less. Even then, the expenditure
would be closely scrutinized.
The “Parkdale” model is a traditional stuffed armchair design that the company has
produced since it was established. It is a personal favourite of John Filmore’s mother,
who together with John’s father founded the company. However, as styles have changed,
the market for this type of furniture has decreased in recent years, and Filmore’s sales
epresentatives report that the company’s share of this market has also been declining.
Over the past two years, the company’s inventories of this model have risen as retailers
have reduced their orders. The production of this model involves two steps. First, there is
the construction of the wooden frame in much the same way as the other models by the
company’s woodworkers, who are on a job rotation system that moves them from model
to model. This is followed by the addition of the upholstery by skilled workers. As a
esult, the production of the “Parkdale” model requires more labour than the other
models. In order to retain skilled upholsterers, in recent years the company had to
increase their wage rates more rapidly than those of other plant employees, who have felt
that they were being treated unfairly.
By the end of 2018, John Filmore had grown quite concerned about the future of the
company’s chairs division. On the suggestion of a consultant, the company’s income
statements for the past four years were
oken down in an attempt to determine the
evenues and costs for each of the three models. For manufacturing costs, this could be
done quite precisely, as the following statements show. For fixed expenses (aka overhead
or S,G,&A), this was not possible, so these were simply allocated to each model
according to that model’s percentage of sales revenues – for instance, since the
“Caledonia” accounted for 36% of 1998 sales, 36% of non-manufacturing expenses
($740,000 in total) were attributed to it. The allocation was a
itrary, but no-one had
suggested a better method of dealing with overhead costs. This allowed the revenues and
costs for each of the company’s three models of chairs to be identified, as shown on the
following pages.
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On the basis of this information and the information provided in the foregoing, what
would you recommend that management do concerning the chair division of the
company?
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REVENUES & COSTS
“CALEDONIA” MODEL
($ thousands)
XXXXXXXXXX XXXXXXXXXX
Revenues $1,000 $1,080 $1,180 $1,300
Cost of Goods Sold:
Opening inventory XXXXXXXXXX XXXXXXXXXX90
Materials XXXXXXXXXX XXXXXXXXXX470
Labour XXXXXXXXXX XXXXXXXXXX330
- Closing inventory XXXXXXXXXX XXXXXXXXXX100
XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Gross profit XXXXXXXXXX XXXXXXXXXX510
Fixed Overhead:
(prorated by sales XXXXXXXXXX XXXXXXXXXX270
Operating Profit XXXXXXXXXX XXXXXXXXXX240
“FILMORE” MODEL
($ thousands)
XXXXXXXXXX XXXXXXXXXX
Revenues $1,200 $1,220 $1,250 $1,280
Cost of Goods Sold:
Opening inventory XXXXXXXXXX XXXXXXXXXX
Materials XXXXXXXXXX XXXXXXXXXX
Labour XXXXXXXXXX XXXXXXXXXX
- Closing inventory XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX950
Gross profit XXXXXXXXXX XXXXXXXXXX
Fixed Overhead:
(prorated by sales XXXXXXXXXX XXXXXXXXXX
Operating Profit XXXXXXXXXX XXXXXXXXXX70
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“PARKDALE” MODEL
($ thousands)
XXXXXXXXXX XXXXXXXXXX
Revenues $1,400 $1,320 $1,200 $1,030
Cost of Goods Sold:
Opening inventory XXXXXXXXXX XXXXXXXXXX
Materials XXXXXXXXXX XXXXXXXXXX
Labour XXXXXXXXXX XXXXXXXXXX
- Closing inventory