Question #8

New sales (including tax) = 1,500 × (1 – 0.075) × (1 + 0.10) = 1,526.25 Sales tax = (1,526.25 / 1.10) × 10% = 138.75 Net sales = 1,387.50 Due to 7.5% reduction in units sold, COGS will decline to 630 × (1 – 0.075) = 582.75 Selling expenses currently are 8% of sales. New selling expense = 1,526.25 × 0.08 = 122.10 Administrative expenses are fixed at 330. Operating profit = 1,387.50 – 582.75 – 122.10 – 330 = $352.65, which is 25.4% of $1,387.50. (Module 14.2, LOS 14.l) Janet Smith has gathered the following information for the Power Tools Manufacturer market in the U.S. and this is part of the first phase of analyzing the businesses in the industry. The following issues are relevant: 1. Raw material and component purchases consist mainly of plastics (for casing) and motors (for power). Some hardened steel is required to make drills and bits. 2. Access to a reliable and efficient source of supply is critical, especially with regard to the electric motor. 3. Two manufacturers in the U.S. produce over 90% of the electric motors for the U.S. markets. 4. Workers in the industry have a strong and well-organized union. As a result, the rate of compensation growth is a cause for concern, as is the associated health and pension benefits accruing to the work force. 5. Industry revenues have tended to track the fluctuations of the wider economy. 6. Sales growth in the industry has been 5% compounded annually over the past eight years. 7. Non-U.S. sales grew 10% compounded annually over the last eight years. 8. The rate of growth in home ownership and new home starts is directly related to the future volumes of power tool sales. 9. The three largest global producers of power tools control 80% of the U.S. markets, down from 85% five years ago. 10. Economies of scales are critical to efficient and cost effective use of manufacturing resources. 11. High capital expenditure is required to maintain plant and equipment. 12. The major areas for competition for all the manufacturers are price and delivery times, these are the critical areas of concern for the major retail outlets. 13. China has become the third largest global market for power tools, and significant production facilities in this market have led to the potential for major export growth to the U.S. In other industries, Chinese producers have been able to match and often better local producers on price and delivery times. 14. 75% of sales in the U.S. market are made through 12 major retail chains. They are always looking for ways to reduce the price they pay to manufacturers. 15. Sales of power tools is highly seasonal due to customer buying patterns often related to the weather. 16. Consumers are looking for value for money but surveys indicate that they are not only looking for the lowest price. They do value quality and surprisingly the look of the product is more important than many thought. 17. Taking a broad view of the markets, it is difficult to envisage alternative products and technologies playing a significant role in the development of the market for the foreseeable future.