RELATIVES, RAPID GROWTH, AND REDUCED business. Richard called Edward into his office to express PROFITS his concerns in no uncertain terms, Richard questioned the rapid expansion of the customer base. Was expansion By 2014, Richard was ready to retire again. He wanted to necessary? Was it worth the amount of time and money being maintain ownership control of the company but no longer expended? How were porential customers selected? How wanted to be involved with operations. Richard approached many customers were too many Richard wanted answers his grandson. Edward, about assuming operational control. and proof that the expansion would lead to success, Richard Edward recently earned an MBA degree and worked for tried to convince Edward that Carolina Creations did not a management consulting agency in the area. He was need more customers; it needed the right customers-ines eager to put his education and experience to work in the they could make money from. Richard gave Edward his family business. Edward assumed control in late 2014 marching orders: "Straighten out this mess you created, and and immediately began an extensive expansion program. do it quickly."' Edward knew if he did not get a handle on Edward's goal was to expand Carolina Creations across the the costs and pricing, he may bankrupt the company. Even Southeast United States and eventually nationwide. worse, it could seriously strain his relationship with his Edward realized that Carolina Creations had outgrown grandfather and other family members. its organizational structure. He began hiring accounting, The 75% markup over cost gave the customers marketing, and operations personnel. Expansion required identical gross margins. Edward wondered whether the significant resources, and the growth in selling, general costs, markups should be increased or if they should be different and administrative costs quickly outpaced sales growth. for different customers. Unfortunately, there was no way Carolina Creations' marketing team vigorously pursued new of knowing how customers would react to higher prices customers across the region, approaching everything from or which customers should have higher or lower markups. small interior design shops to large furniture warehouses. Guessing was not an option. Guessing wrong could result Many of the contacts proved fruitless, but a sizable number in lost customers if markups were increased and customers became new customers. Sales continued to grow. Before responded negatively, and profits would be reduced if some long, though, the costs of the expansion caught up with customers were unnecessarily or incorrectly given lower Carolina Creations, and profits began to deteriorate quickly markups. The problem was obvious. Operating expenses (see "Table 1). If the trend continued, Carolina Creations were increasing faster than sales. Edward knew he needed would soon be experiencing significant losses. Something better information. He instructed the Marketing and had to be done. Accounting departments to do a thorough analysis of how Richard became concerned. Edward's Ivy-League the company interacted with customers, with an emphasis education and ideas may work for large corporations, but on determining whether the company was making or losing they did not seem to work for the small, family owned money from each. Table 1. Carolina Creations' Statement of Operating Income Years Ended December 31, 2014 Through December 31, 2018 2018 2017 2016 2015 2014 Sales $3,114,160 $2,223, 148 $1,638,140 $1,300,075 $1.134,998 Cost of Goods Sold 1.779.520 1.270,370 936,080 742,900 648,570 Gross Margin .334,640 952,778 702,060 567,175 486,428 Operating Expenses .276,806 844.796 556,968 390,023 317.799 Operating Income $57,834 $107,981 $145 092 $167.153 $168.628 Note. All monetary values are represented in U.S dollars