Case study Midlands Furniture Ltd

Midlands Furniture Ltd. designs, manufactures, and sells contemporary furniture for UKs domestic customers. Competition in furniture business is intense with profit usually based on a return on capital employed of average 15 percent.

Earlier in 2021, Midlands Furnitures product manager, Joseph Alvarez, anticipated that as the pandemic related restrictions will gradually be lifted and while people might not be able to fully materialize their foreign holiday plans this year, there would be an increase in demand in the UK for outdoor dining tables for barbecues, outdoor social gatherings, etc. Li Ling is the product designer for Midlands Furniture, and she has spent much of the past few months working on the design of an extendable outdoor dining table, to be made from Teak wood. The design has been well-received by Joseph. However, Joseph wants to make sure that the table can be priced competitively. The companys accountant, Anna Moskal, presented Joseph with the following cost data (see Exhibit-1) for the expected production and sale of 200 extendable outdoor dining tables over next five months:

Midlands Furnitures target operating income is 10% of revenue and Joseph proposes that the company can successfully market the table for 2,000.

As the first batch of tables was about to complete the production process, the company held an internal review meeting involving Joseph, Li, Anna and the Marketing departments head, Philip Connolly. Two key concerns were raised in the meeting:

Before the meeting Joseph was able to inspect some of the finished units of the newly manufactured table from the first batch, and discovered that Li has designed the table 5cm wider than the standard size of wood. Reducing the tables size by 5cm will lower the cost of direct materials by 40%. However, the redesign will require an additional 6,000 of design cost, and the table will be sold for 1,950 instead of 2,000.

Among the top revenue generating customers for Midlands Furniture are three department-stores, namely A, B and C. Philip was concerned about the profitability from these department-stores and had asked Anna, to prepare a customer profitability analysis for these department-stores, based on dealings with them in the previous year. Anna brought to the meeting Exhibit-2 which includes a variety of information, including the sales revenue from these three department-stores, travel costs, cost of handling orders and deliveries, and the cost of sales visits undertaken to these customers sites, during last year1.

While referring to this data (Exhibit 2), Philip remarked that some of these department-store customers have not been profitable for Midlands Furniture, and therefore he anticipates that selling the new table to the unprofitable department-store customers would be a loss-making venture. Philip stresses that they need to analyse the data contained in Exhibit 2 in order to decide how best to tackle the loss-making customer.

Question:

ii.Discuss how value-engineering can be used for achieving target-cost. This discussion should be presented with reference to the given scenario in Midlands Furniture Ltd (MFL). iii.Provide clear calculations in support of criteria ii.

Exhibit-1 Budgeted cost % of total Design cost Direct materials 5,000142,0001%36% Direct manufacturing labour 110,00028% Variable manufacturing overhead 54,00014% Fixed manufacturing overhead 46,50012% Marketing 35,000392,5009%100% Exhibit - 2 Department-store customers A B C Net Sales Revenue Variable cost Contribution 40,00026,00014,00020,00013,0007,00012,0007,8004,200 Customer related costs Delivery cost (regular) Emergency deliveries Order costs 5,0002,5001,500 Handling returned items 4,115 Sales visits Customer margin (profit) 750150150 Customer margin percentage 1,1653,5501,050 3%18%9%