Swisher Mower and Machine Company (Smc)

RECOMMENDATION: Swisher Mower and Machine Company should reject the offer to produce the Private-Label brand. RATIONALE: †¢Standard Riding Mower contribution per unit would drop from $97 to $33. 98, which is $63. 02 per mower. (Appendix 4) †¢Contribution Margin would drop from 14. 92% to 5. 5%, which is 9. 42%. (Appendix 4) †¢Swisher Mower would only profit $62,819 from producing the 8,200 units in the Private-Label in the first full year of production. (Appendix 5) oProfit per mower is only $7. 66 per unit. Cannibalization of SMC current mower is ($29,000) loss from the private-label brand. Plus, the loss of additional smaller independent dealer in the future since there will be an overlap in trade areas. (Appendix 3) †¢SMC will incur additional labor cost on 2,450 units because the factory is already at full capacity. oThis results in additional $63,700 overtime labor cost, which is $7. 77 per unit. (Appendix 1) †¢With the increase in labor, materials, over head, and property tax, the additional variable cost is $30. 52 per unit. Appendix 1) oThis brings the total variable cost to $583. 52. (Appendix 4) †¢SMC will only be making $7. 66 per mower, and the company wants them to pay $22 per hour for any maintenance on a mower under warranty. Therefore SMC would have to sell 3 additional mowers to cover each hour work done to a mower under warranty. †¢The accounts receivable and inventory carrying cost for the private-label brand is $175,789. 97, $59,386. 73 and $116,412. 24 respectively. (Appendix 2) †¢The image of company would be altered since SMC would double their sales with one private-label product. Since the company has a reputation of being small and personal introducing the private-label could be detrimental to their current business. †¢Remain status quo and on average increase profit by 10% and continue to widen the breathe of the product lines, Trim-Max. APPENDICES APPENDIX 1 Incremental Cost for Private Label Direct Labor Cost $650 x 4% = $26 Additional Labor for 2,450 units = 2,450 x $26 = $63,700 / 8,200 units = $7. 77 per Unit Direct Materials Cost $650 x 1% = $6. 50 Additional Overhead $650 x 1% = $6. 50 Additional Property Tax $650 x 1. % = $9. 75 Total Additional Var. Cost = $7. 77 + $6. 50 + $6. 50 + $9. 75 = $30. 52 APPENDIX 2 Carrying Cost for Private Label Accounts Receivable A/R Turnover Rate = 365 / 45 = 8. 1 8,200 units x $617. 50 = $5,063,500 / 8. 1 = 625,123. 46 x 9. 5% = $59,386. 73 Inventory Inv. Turnover Rate = 5. 8 Average Inv. = 2,100 units Unit Cost = $583. 52 2,100 units x $583. 52 = $1,225,392 x 9. 5% = $116,412. 24 Total Carrying Cost = A/R + I nv. = $175,798. 97 APPENDIX 3 Cannibalization SMC mower = $650 – $553 = $97 Contribution Per Unit Units Lost = 300 $97 x 300 = ($29,100)