Swisher Mower
...rope and the South Pacific. We understand the industry is highly seasonal with the most sales occurring in March, April, and May. We need to focus on the pros and cons of introducing our project as a private label nation-wide. We need to look at the additional costs for production, financing, materials, and most importantly the costs of loans and their interest. Analysis of Problems Assumptions: We are projecting for 1996 to sell 4,250 Ride Kings without accepting the proposal. Assume private label will complete full 8200 order for year 1, disregarding the 700 samples sent in January 1997. Assuming an average pay period of 45 days including delivery. If we do accept the proposal, we will not pursue a different advertising strategy. Alternative Solutions: The problem for Swisher Mowing Company is not a matter of choosing a variety of options, but rather whether or not to accept the proposal from the national merchandising chain. This means we must project the results if Swisher accepts the proposal and if Swisher declines the proposal. For both situations, there are a number of both qualitative and quantitative issues to consider. Should Swisher not accept the private brand proposal, there would be several theoretical advantages to consider. First of all, without the additional 8,200 units to produce, Swisher can avoid a considerable strain on its manufacturing capabilities. This is important to consider because by accepting the proposal, Swisher will be exceeding its capabilities and is forced to assume overtime charges. Secondly, the investment in a private brand line will only result in a return of approximately 1% of the investment. This is a considerably lower payout than the average 10% return that Swisher consistently achieves. Thirdly, after reviewing the unit sales of Swisher riding mowers and lawn tractors in the years 1974-1994, there is no indication that sales are slumping or in decline. It may be an unnecessary to assume that the only way to entice sales growth is through the private brand avenue. Furthermore, Swisher could improve its unit sales and brand equity by using the $12,000 it has projected for start-up cost in the private brand proposal for a more aggressive advertising and sales campaign with both new and current dealers. SWISHER PROJECTED SALES – DENYING PROPOSAL Ride King (63.6% of sales) $2,762,500 Manufacturer’s List Price $650 Units Sold 4250 units T-44 Trailmower (8.2% of sales) $ 356,134 Kits (8.2% of sales) $ 356,134 Replacement Parts (20% of sales) $ 868,619 Total SWISHER Sales $4,343,095 SWISHER PROJECTED GROSS PROFIT IN 1996 – DENYING PROPOSAL Ride King (57.8% of total gross profit) Manufacturer’s List Price $650 Cost of Goods Sold Labor $100 Parts $453 Total $553 Profit Margin per Unit $97 Units Sold 4,250 units $ 412,250 T-44 Trailmower (13.2% of total gross profit) $ 94,147 Kits (0% of total gross profit) $ 0 Replacement Parts (29% of total gross profit) $ 206,838 Total Gross Profit $ 713,235 There are a number of indications that Swisher must make changes to their current sales strategy. Swisher sales have not slumped, but have plateaued in the 1990’s to average unit sales of 4,250 units per year. Last year was no exception, with sales totaling 4,200 units. There is no information to indicate that Swisher will break out of this trend in the near future unless they make changes. Furthermore, the industry is currently undergoing a boom in lawn mower sales, and sales in 1996 are expected to increase. This evidences a current market for lawn mowers, which Swisher is not utilizing. Clearly, Swisher can, and should increase sales. Currently, private label sales in the industry account for 65-75% of all industry sales. Furthermore, national merchandising chains are the distribution channel with the highest proportion of industry sales at 40%. Swisher sales are currently not in line with those of the industry: private label sales account for only 40% of Swisher riding mower sales and Swisher currently doesn’t sell their product to a national chain. According to these numbers, the company may be failing to reach a large portion of the lawn mower industry. Swisher currently competes on a regional basis, but the national merchandising chain will open Swisher to the national market and nearly triple the company’s annual units sold. However, the proposal also allows the company to maintain its current “small company” image, since the terms of the proposal prohibit Swisher from using its own logo on their private label mowers. This opportunity is also less risky than other alternatives to increasing sales. Rather than accepting the proposal, Swisher can increase sales through the expansion of its product line by introducing the new Trim-Max and/or pursue more aggressive advertising. Both options could result in greater sales, but the potential sales results are difficult (and more costly) to project than the proposal at hand, and are not guaranteed. The national merchandising chain is offering a proposal with a specific number of units ordered and a specific price per unit, allowing Swisher to project sales for the upcoming year. Furthermore, Max Swisher has been able to quantify the added costs of producing each unit for the national merchandising chain – which allows him the ability to also project Gross Profit for the upcoming year – along with cannibalization and financing of the increased accounts receivable. The proposal can therefore be accepted or rejected based upon its projected profitability. Profitability is the only criteria to consider since the Swisher name will not be on the private label mowers, and therefore will not build brand equity for Swisher (and drive sales of other Swisher products). The sales and profit figures for the proposal are as follows: Sales and Profit of Private Label with National Chain Manufacturer’s Sale Price $650 Less: 5% of Manufacturer’s Selling Price $ 32.50 Current Costs of Goods Sold $553 Added Costs of Proposal Overtime (4% of Man. Selling Price) $ 26 Direct Materials (1%) $ 6.50 Overhead (1%) $ 6.50 Additional (1.5%) $ 9.75 $ 48.75 Contribution per Unit $ 15.75 8,200 units ordered per year Total Sales $5,063,500 Gross Profit $ 129,150 Although the current manufacturer’s selling price is $650, the national merchandising chain is asking for a constant, low price at 5% below the current sale price. Swisher will therefore receive a price of $617.50 per mower from the national chain. Since the national chain will place annual orders of 8,200 units, the total sales for 1996 will be $5,330,000. The added costs per unit are also reflected in the chart above, which drops the contribution of each mower to $15.75. This, multiplied by the 8,200 units ordered for the year, create a Gross Profit of $129,150 for the order. There are other costs to consider, however, particularly with regard to the financing of the proposal. The terms of the proposal allow for an average 45-day period between the delivery of product and payment for that product. Swisher must take loans from the bank to finance their accounts receivable for this 45-day period. The figures are as follows: Financing the Proposal Price per Unit $617.50 Total Units 8,200 units Annual Accounts Receivable $5,063,500 Interest (9.5%) $ 468,763.25 Adjusted for 45-day period $ 59,305 Essentially, every unit must be financed, since payment only comes after the units are delivered. This means that total accounts receivable for the year will equal sales, at $5,063,500. Swisher currently takes loans at a rate of 9.5%, but only borrows money for 45 days (not a full year), so total interest the company will pay on the proposal will be about $59,305. With other costs aside (such as Selling, General & Administrative...