Lieber Light
...force to one person, but focus on providing quality service instead to allow Lieber to differentiate itself more. In the medium term, and only when their costs have been reduced, Lieber should re-consider launching a price war to recapture market share and/or drive Vancouver from the market. But even if it doesn’t follow through, Lieber must continue to lower costs with a stretch target of 25% efficiency so that it can match its competition. It should also investigate expansion into Canada, as Vancouver has shown that a low-cost two-country model can work. This plan will ensure Lieber Light has a good footing on which to compete and build towards its future. And once it does do that, the skylight will be the limit. EXHIBITS Exhibit 1 Notes: This analysis is based on the assumption Vancouver Light’s market share was stolen entirely from Lieber. The reasoning is: The market is fixed at 45,000. True Homes switched its 6,000 units to Vancouver, and two mid-sized builders (who buy an average of 1,000 units each) also switched. Chieftain Homes ordered 40% of its 7,000 units (2,800) from Vancouver, so 6,000 + 2,800 + 1,000 + 1,000 =10,800, which is roughly equal to Chu’s projection that Vancouver would sell 11,000 units this year. Another known fact is prior to Vancouver's entry, Lieber held 70% of the market. Today, they have picked up 11,000 in sales, which is a 25% increase. This infers those gains were solely at Lieber’s expense Exhibit 2 Lieber Light Income Statement - Today Sales1 Cost of Goods Sold2 Gross Profit Fixed Expenses General Overhead3 $273,000 Manufacturing Overhead4 $315,000 Net Profit $4,032,000($2,520,000) $1,512,000 ($588,000) $924,000 1 Sales arrived by taking the amount Lieber Light was selling (21,000 units), and subtracting from it the amount that Chieftain Homes (60% of its 7,000 skylights = 4,200 units) was buying because it was obtaining a discount. Then the larger amount was multiplied by the average factory price, and Chieftain’s volume multiplied by the discount it received (20% off) The formula then, was [ (21,000 – 4,200) * $200 ] + [4200 * $160] = $4,032,000 2 Formula: [ 21,000 units * Variable Cost of ($135 - $15 in manufacturing overhead)] = $2,520,000 3 General Overhead was given as $390,000 for Lieber as a whole, but because 70% of Lieber sales are skylights, only 70% of the general overhead should be attributed to skylights revenue as a skylights expense Formula: [$390,000 * 70%] = $273,000 4 Manufacturing overhead was given as $15 / unit so * 21,000 units = $315,000 Exhibit 2a Profit Margin – Lieber Light Profit Margin – Vancouver Light Net Profit Sales $924,000$4,032,000= 22.9% $536,250$1,760,000= 30.5% Exhibit 3 Vancouver Light Income Statement - Today Sales5 Cost of Goods Sold6 Gross Profit Fixed Expenses General Overhead7 $0 Manufacturing Overhead8 $123,750 Net Profit $1,760,000($1,100,000) $660,000 ($123,750) $536,250 5 Sales arrived by taking the projected Vancouver Light sales (11,000 units) and multiplying by $160 sales price The formula: [ 11,000 * $160 = $1,760,000 ] 6 Lieber’s VC is $120/unit, and Vancouver is 25% better : [ 11,000 units * $120 VC(*0.75 improvement)] = $990,000 However, because of import tariffs and transport, the variable cost should be ($120 * 0.8333) = $1,100,000 7 Assume Vancouver Light does not have a sales staff (Jennifer McLaren works two days a week to sell skylights) so general overhead is $0, as McLaren (and Carl Garner and some associates) own the business. That is unlike Howell, Chu, and Carney, who are employees of Fraser Co. and need to be paid. McLaren et al, as owners, get paid when they draw on net profits, so fixed salary/general expense for Vancouver would be $0 8 Another assumption is made that because Vancouver’s VC was 25% better because of a special production facility, their manufacturing overhead will be 25% less than Lieber Light’s Formula: [($15*0.75) * 11,000 units] = $123,750 Exhibit 4 Lieber Light Income Statement – Price Retained At $160/Unit Sales9 Cost of Goods Sold10 Gross Profit Fixed Expenses General Overhead11 $273,000 Manufacturing Overhead11 $210,000 Net Profit $2,800,000($1,680,000) $1,120,000 ($483,000) $637,000 9 Sales arrived at by taking the original sales amount, since those are customers that will not qualify for Vancouver’s discount and will stay with Lieber. Chieftain, however, will have switched its entire business because it is cheaper The formula is: [ (21,000 – 7,000 Chieftain sales) * $200 ] = $2,800,000 10 Cost of Goods sold will now be: [ 14,000 units * Variable Cost of ($120)] = $1,680,000 11 General Overhead remains the same, but Mfg Overhead: $15 / unit * 14,000 units = $210,000 D In Profits: [ ($637,000 - $924,000) / $924,000 ] = -31% D in Market Share: [ (21,000 / 45,000) * 100%] – [ (14,000 / 45,000) * 100% ] = -15.6% Exhibit 5 Lieber Light Income Statement – Cut Price To $130 For Large Orders Sales11 Cost of Goods Sold12 Gross Profit Fixed Expenses General Overhead13 $273,000 Manufacturing Overhead13 $405,000 Net Profit $4,490,000($3,240,000) $1,250,000 ($678,000) $572,000 11 If prices were to drop to $130, and assuming Vancouver Light does not match, then Lieber will recapture most of the market it had originally lost (it’s original market + the 7000 Chieftain will purchase + 6000 from True Homes) The formula is: [ (14,000) * $200 ] + [(7000 + 6000 * $130] = $4,490,000 12 Cost of Goods Sold: [ 27,000 units (original 21,000 + 6,000 from True Homes) * VC of ($120)] = $3,240,000 13 General Overhead remains the same, but Mfg Overhead: $15 / unit * 27,000 units = $405,000 D In Profits: [ ($572,000 - $924,000) / $924,000 ] = - 38.1% D in Market Share: | [ (21,000 / 45,000)*100%...