I need help with the required questions related to finnegan's garden case study?

UVA-C-2180 Rev. Jun. 17, 2009 Abstract for promotional use only. Full version available at www.iesep.com FINNEGAN'S GARDENS Patrick Finnegan sat back in his office chair and frowned. In front of him lay the latest income statement for Finnegan's Gardens, the landscaping business he had run since purchasing the Garden Center from Mary Jane Bowers more than four years ago. In general, Finnegan did not spend too much time reviewing his company's financial data. As long as profits continued to rise, Finnegan considered finances to be the responsibility of his accountant, Sue Bennett. Recently, however, he had become more focused on the financial results of Finnegan's Gardens. Finnegan had four children nearing college age, and he knew his family would be incurring substantial higher-education costs over the next several years. Finnegan wanted to grow his business, but did not know which of the company's three service lines presented the most lucrative opportunity. Background After earning a college degree in landscape architecture, Finnegan spent a summer touring the renowned gardens of Great Britain. Inspired, he returned to his hometown and purchased the Garden Center from Mary Jane Bowers. Finnegan expanded the existing nursery, discontinued retail operations, and transformed the company into a full-service landscaping business. Over time, Finnegan's Gardens gained a solid reputation locally, and demand for the company's services continued to grow. Finnegan took great pride in providing a full spectrum of landscaping and maintenance services to both commercial and residential customers. Services Provided Finnegan's Gardens offered three main landscaping services to clients in and around the local area. Finnegan and one other full-time designer provided landscape-design services, which brought in revenue of $180,000 during the past year. In addition, 10 part-time employees installed plant and irrigation systems for Finnegan's design clients and other customers, generating $820,000 in revenue for the company over the past year. Finnegan's Gardens also provided such landscape-maintenance services as lawn mowing, mulching, and pruning on a This case was prepared by Kristy Lilly (MBA '03) and Liz Smith (MBA '04) under the supervision of Professor Mark Haskins. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2003 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School Foundation. Rev. 6/09. Distributed by IESE Publishing. If you need copies, please contact us: www.iesep.com. All rights reserved. -2- UVA-C-2180 scheduled basis. During the past year, revenue from this segment totaled $280,000, and Finnegan employed eight part-time workers to handle the existing clientele. The company's one-time design and installation clients often became long-term-maintenance customers. Abstract for promotional use only. Full version available at www.iesep.com Finnegan's Analysis Finnegan looked again at the company's most recent statement of earnings (Exhibit 1). Although the firm was clearly making a profit margin of approximately 12% overall, Finnegan was unsure if all three services were equally profitable, information he needed in order to decide which service(s) he should try to expand. He concluded it was about time he paid attention to the company's accounting data, and decided to call Sue Bennett with some additional questions. Based on their discussion, Finnegan learned the following information: 1. In addition to Finnegan's $85,000 annual salary, the other garden designer earned $62,000 a year. During the past year, an average of 80% of the designers' time was spent on design, the rest on general supervision and administration. 2. Plant and sod costs were 45% of installation revenues for the year and 15% of maintenance revenues. 3. Each installation employee worked an average of 1,500 hours a year at a rate of $15 an hour. Each maintenance employee worked an average of 1,200 hours a year at a rate of $12 an hour. 4. Miscellaneous materials and other supplies averaged 3% of revenues for all three service lines. Following his discussion with Bennett, Finnegan sat down and prepared a statement of earnings for each of the company's service lines (Exhibit 2). Finnegan knew that an accurate allocation of the shared costs of depreciation, rent, and support personnel was critical to determining the service-line profits for his company, but he did not know how to go about allocating those expenses. Therefore, he put those costs in a column labeled \"Administration\" and called Bennett for help. \"I've seen it done several ways,\" Bennett told Finnegan in response to his questions about overhead allocation. \"Sometimes, shared costs for service businesses are allocated based on the number of full-time equivalent employees (FTEs) in each service line. Other times, overhead costs are allocated based on direct-labor dollars, direct-labor dollars plus directmaterials cost, or another metric of your choosing. In addition, you might want to consider which of your three service lines actually use each of the overhead departments.\" Together, Finnegan and Bennett determined the number of FTEs for each service line, and how each line used the shared resources of the company during the past year (Exhibit 3). He Distributed by IESE Publishing. If you need copies, please contact us: www.iesep.com. All rights reserved. -3- UVA-C-2180 Abstract for promotional use only. Full version available at www.iesep.com also considered the effects on the shared resources if he decided to grow revenues by approximately 10% for each of the service lines. He knew that he was currently at full capacity with his existing trucks, and would need to purchase a new truck to expand any of the service lines. A new truck would cost approximately $25,000, and would be used for at least five years. In addition, if he expanded either the installation or maintenance line, he would have to rent additional nursery space at a cost of $10,000 a year. He thought that most of the other costs would remain approximately the same regardless of the service line he chose to expand. Finnegan looked forward to completing his analysis as soon as possible, and hoped he would not have to concentrate on the financial data for Finnegan's Gardens too much longer. Required 1. Using information given in the case, allocate the company's shared costs to each service line four different ways: based on FTEs, direct-labor costs, direct labor plus direct materials, and the specific usage information given to Finnegan by Bennett. 2. Calculate the profit percentage for each service line under each overhead-allocation method. 3. Which service line is the most financially attractive? Does the fact that design and installation clients often use Finnegan's Gardens for maintenance services change your answer? 4. Assume volume and revenues for each service line could grow by 10%. Which service line should Finnegan expand? Is your answer congruent with your answer to Question 3? Why or why not? Distributed by IESE Publishing. If you need copies, please contact us: www.iesep.com. All rights reserved