"Manufactured Homes" Case

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16-02-2013Study year 2012-2013
Prof. Dr. Brendan O’DwyerSemester 2, Blok 1
Financial Statement AnalysisAnahita Farokhi 6041949

Case 3: “Manufactured Homes” (MANH)
Question 1
Manufactured Homes is engaged principally in the retail sale of new and used manufactured single-family homes and targets individuals in the low income category. Manufactured Homes focuses on the lower end of the market, according to the company this has two advantages: 1. Since its customers were seeking to fulfil an essential housing need, its customers were less affected by changes in general economic conditions. 2. Repossession rates were significantly lower than those of the industry, since its customers were likely to work very hard to keep their primary residences, even when times were bad. The chairman describes in his Letter to Stockholders that Manufactured Homes primarily wants to be a sales and marketing company, with manufacturing and retail financing on a limited basis to support the company’s growth plan. Manufactured homes acquired many retail outlets in the years up to 1987. As competition for market share in the manufactured homes industry increased, Manufactured Homes benefited because of its financial advantages volume buying efforts. That was a reason for many independent dealers to work together to with or to be bought by Manufactured Homes. Besides these retail outlets Manufactured Homes bought Craftsman Homes, which had to serve as a facility to safeguard the company during periods when demand for homes outpaced supply. Craftsman Homes also provides the opportunity to produce especially designed homes in smaller numbers, thereby eliminating the major commitment that would be required by unaffiliated suppliers. Finally Manufactured Homes set up a financial services subsidiary, this new entity is employed primarily to facilitate financing agreements with the company’s banks. It does have mortgage lending capabilities, which will, according to management, only be employed at times when its conventional banking arrangements are unable to act on a timely basis. One of the major keys to success for Manufactured Homes is the insistence that its retail people listen to the customers in terms of interior design and features. When the company senses a major trend developing, it goes to its suppliers seeking what eventually becomes an entire new line of homes. Most of Manufactured Homes’ sales were credit sales where the customer paid a down payment of 5 to 10 percent of the sales price and entered in an instalment sales contract with the company to pay the remaining amount over a certain period. Manufactured Homes generally sold the majority of its retail instalment contracts to unrelated financial institutions on a recourse basis. Under this agreement, Manufactured Homes was responsible for payments to the financial institution if the customer failed to make the payments specified in the instalment contract. The instalment rate that Manufactured Homes charged its customers was typically higher than the market interest rate. Therefore, financial institutions to whom these contracts were sold on a recourse basis usually paid the company the stated principal amount of the contract and a portion of the differential between the stated interest rate and the market rate. The company therefore had two sources of revenue: the sales of homes (sales revenue) and the interest rate “spread” (finance participation income) There are four key elements that bear on Manufactured Homes financial performance related to the sale of homes. These elements are: 1. The possibility of repossessions

2. Provisions for recourse financing
3. The occurrence of loan losses
4. Financial participations as an important source of income for the company

Question 2 and 3
Journal entry:
Dr. Cash94,599,589
Dr. Contract proceeds receivable from
financial institutions11,496,078
Cr. Sales106...
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