To Mr. Morrissey:
At the beginning, we great appreciate you to trust us to do this research for your business case. After analyzing the background and information you offered to our company, we did a large number of researches in your specific two products and the industry. At present, the quantitative production and demand of the wood stove are shrinking in the market because of the drastic competitive marketing. Otherwise, the marketing of owner is not significant in competition. Therefore, we are going to focus on wood stove, and offer two assumptions to help you make a decision about your business that you can either discontinue wood stove production and keep production of owner or continue the present production structure. Overview:
According to the information we possessed, your company, Bridgewater Casting, Inc., had been founded in 1938 by your grandfather as a modernization of an older iron forge company. By the early-1970a, it entered into the stove industry and built its only product line to produce wood heating stove. The product attracted the clients who are the house owner and/or some architectural companies. At last year, you introduced a new product line combined wood stove and baking oven which was targeted at person who might consider brick oven baking with wood. This innovation brought some new customers, but the increasing price may impact their competitive capability on the competitive marketing. Due to the company’s long history in the stove industry, your company has a number of advantages compared to other competitors, such as accumulating experience, customer’s loyalty, and good relationship with sale dealers. Moreover, the high quality of products and dependability of your company have already gotten the respect from customers. At present, the traditional product, wood heating stove, was plunged into a situation as competition of severity. Under our judgment, the position of Bridgewater Casting is confronting as follow:
Wood heating stove is the traditional product for Bridgewater Casting; it is in the very severity and shrinking competitive marketing with more than thirty competitors.
Base on the financial statement, sale of wood heating stove is in the net loss situation.
The expanded sales network drove increase in the marketing cost and freight cost.
The competition of wood oven was minimal. Even its sale figure was fully 80% the number of stoves sold, but its future will be optimistic. Due to our research, we think the Key Success Factor includes: Long experience, High quality product, good dealer sale force, and innovation of product.
Quantitative and Qualitative Analysis:
First, we compute the number of the units produced and the sale price per unit. Exhibit 1
A. Manufacturing Costs Per Unit
Number of Units Produced (B/A)
Per Unit (C/D)
Because of the new product line, it combined the wood stove and baking oven to produce together. We consider averaging the depreciation and rent of two products. In addition, 60% of factory support cost is estimated to ovens, and then we figure out the new manufacturing cost below.
Fixed Factory Overhead
A. Depreciation (15 year lives): $800,000
B. Rent (10,000 square feet): $550,000
C. Factory Support: $1,170,000
(Oven: C*60% Stove: C*40%)
Total Fixed Overhead
According to the new Fixed Overhead above, the new Manufacturing Costs is calculated as follow: Ovens: New fixed overhead per unit = $1,377,000 / 20,000 = $ 68.85
Total cost per unit = $192.85
Total cost all units = $3,857,000
Stoves: New fixed overhead per unit = $1,143,000 / 25,000 = $ 45.72
Total cost per unit = $159.72
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