Mavis Candles received a special order from a major Canadian retail store chain, requiring a response in one week’s time. Lovejeet and Rosepreet Sidhu, the firm’s owners, believed that this order represented an important opportunity for Mavis Candles since the company had been struggling financially for the past couple of years. However, before accepting the order, they wanted to assure themselves that their acceptance of it really was in the best interests of the young company’s growth and development. 

COMPANY BACKGROUND 

Mavis Candles (MC) was a small, family-owned and operated manufacturer of candles since 2005. The company was located in a small town in South Western Ontario, Canada. MC produced a single size, high quality candle with a unique, tapered shape, that distinguished MC from other larger mass-produced candle manufacturers. The candles were produced by an injection molding process which formed the wax into the required shape. MC has considered diversifying its product portfolio into other shapes or more trendy fragrant or aromatherapy candles, but has shied away from the added production complexity. Currently, MC’s candles were sold to distributors, who serviced a variety of small independent retailers, in Canada and the Eastern United States. 

THE SPECIAL ORDER 

A buyer for a major Canadian retail store chain had been impressed with the shape of Mavis’s product and approached MC. The buyer wanted to purchase the same candle size and design, so new molds would not be required to complete this order. After this potential customer initially approached MC, Lovejeet travelled to Toronto to meet with the retail chain’s purchasing department team. The meeting had been very successful, and one week later a firm order by the retail store chain was received. Lovejeet’s client entertainment costs in soliciting the order amounted to $525. After the initial jubilation of soliciting the order had subsided, Lovejeet began to have second thoughts about the deal. MC’s standard wholesale price was $2.74 per unit, whereas the special order was contingent upon a firm price quote of $2.42 per unit. Obtaining the order would certainly be a major step forward for MC and could lead to large future orders from this customer or other major retailers. The company’s profit margins were already “squeezed” severely and Rosepreet thought that a candle could not be produced for less than $2.58. Although the company’s accountant had not yet produced last year’s financial results, Rosepreet expected that the company’s net profit would have been between $20,000 and $24,000. Exhibit 1 shows the company’s budgeted costs for the current fiscal year, excluding any allowance for this special order. Based on this data, Rosepreet concluded that the company’s net profit margin was only about 6 per cent at the existing $2.74 selling price. 

OPERATIONS MC’s factory was currently operating at its one-shift capacity of 12,000 candles per month and had a small backlog of orders. The special order under consideration was for 8,000 candles, to be delivered within two months, in time for the Christmas season. Lovejeet believed that this quantity could be handled by having employees work some overtime each week for the next two months. Of the total utilities costs, 90 per cent varied directly with production activity. The remaining utilities expenditures related to keeping the factory and office areas heated and lit. All production equipment was being depreciated using the units-of-output method, based on the costs and life expectancies of the machinery and molds. Production molds were not very expensive, but did require regular polishing and maintenance after approximately 7,000–10,000 units were manufactured. The mold supplier provided this service on a contract basis at a rate of $500 per visit. Design cost amortization and office equipment depreciation were both calculated using the straight-line method over ten years. A production supervisor was paid a monthly salary of $3,200 (including benefits). Lovejeet believed that he should be paid a bonus of $500 per month if extended overtime work was needed for this order. The two factory workers (non-unionized) were paid hourly and worked 35 hours each week. They also received time-and-one-half for any overtime work. 

FUTURE EXPANSION As Lovejeet and Rosepreet mulled over whether to accept this order, they knew that their response to this order would have a major impact on the company’s future. Expansion was a desirable strategy, if the financial rewards compensated for the increased risks and additional work involved; however, neither owner was totally comfortable dealing with large retail chains who could wield a great deal of bargaining power. Lovejeet was also not convinced that MC was even efficient enough to compete successfully in the larger, more aggressive retail chain store market. Yet, Lovejeet and Rosepreet realized that something should be done to improve MC’s marginal profitability and, if they were to reject this order, it would be unlikely that this retail store chain would solicit further orders from MC. Exhibit 1 MAVIS CANDLES BUDGETED COSTS FOR CURRENT FISCAL YEAR Budgeted Cost (144,000 Units) Raw Materials $149,760 Wages 54,720 Owners’ Salaries 68,000 Rent 15,000 Utilities 8,000 Supervision 38,400 Mold Polishing 9,000 Production Equipment Depreciation 8,640 Design Cost Amortization 3,760 Office Equipment Depreciation 1,720 Selling Expenses 6,000 Interest 4,800 Office Supplies 520 Other Expenses 3,200 Total Costs $ 371,520

BMGT 265 – Managing Strategically Capstone

Winter 2021 Practice Case Test

CASE: Mavis Candles

Instructions:

• Read the Case
• Answer the questions in the template below.
• You have 2 hours and 30 minutes to complete and submit.

Answer the following questions (use as much space as required):

1. Environment Analysis: Prepare a SWOT analysis for MC.	15 pts
2.Strategy / Positioning: Do you believe that the shape of MC’s candle potentially represents a sustainable competitive advantage? Why/Why not? How could you build on MC’s value proposition?	5 pts
3.Investment / Diversification: Considering the Ansoff Matrix, which type of growth strategy does this order represent?	5 pts
4.Finance: Detail the incremental costs for fulfilling the order. How much incremental profit/loss does MC stand to make from the order (State any assumptions)?	25 pts
5.Marketing: a) Considering MC’s cost structure, what are the main opportunities to improve MC’s profitability? b) What changes are required for MC to deliver on this opportunity?	15 pts
6.Operations: What would be MC’s annual breakeven volume in units? Show your calculation of fixed and variable costs. State any assumptions.	25 pts
7.HR / Ethics: Could Lovejeet’s expenditure of $525 on entertaining the retailer be constituted as a conflict of interest by the buyer? Explain why / why not.	5 pts
8.Leadership: As the owners of MC, will you fulfil the order? Why or Why not?	5 pts
TOTAL	100 pts