The Big Furniture Company (BFC) designs and manufactures furniture. It competes in the market by producing fashionable furniture at a low price. It has a design department which employs creative designers to help with the design process which includes choosing the types of materials to use to make each specific piece of furniture. The furniture is then manufactured in BFC's factory which operates at full capacity (i.e., there is more demand for BFC's products than what the company is able to produce). BFC prides itself at being able to design furniture that that is both fashionable (thanks to its design department) and cheap. Once its design department is happy with a specific piece of furniture, it is then manufactured in BFC's factory using materials sourced from its suppliers. The Purchasing Manager is responsible for purchasing the materials that meet the design team's specifications. Due to the competitive nature of the market for materials, the prices for these materials are fairly similar from one supplier to the other. BFC has a customer known as C1. C1 gets BFC to design office furniture that suits C1's price and functionality requirements. Meeting C1's price requirement is particularly important because C1 has a very tight budget. BFC would then manufacture these items for C1. Based on a recent customer profitability analysis, C1 has been found to be one of BFCs least profitable customers (see analysis below). However C1 has unexpectedly just filed for bankruptcy and hence will not be purchasing furniture from BFC in the future. BFC has just completed a profitability analysis for all its customers, The analysis on C1 for the most recent month is provided below. These numbers have been stable over the past twelve months. Analysis of C1 for the most recent month: BFC's total revenues from items sold to C1 BFC's total variable cost of items sold to C1 BFC's total fixed cost allocated to C1 Total profit/loss incurred by BFC for serving C1 $220,000 $180,000 $40,000 $0 (break-even) These questions relate to the information provided previously about BFC A. Do you agree with the following statement "The cost of materials for BFC's furniture are locked- in during the design phase". Use specific information from the question to justify your answer. [3 marks) B. It is mentioned previously that BFC's factory operates at full capacity. How should this piece of information affect BFC's short term pricing decision if it receives a special (one off) order from a new customer? Explain. [3 marks] C. Which long-term pricing approach is likely to be more appropriate for BFC when determining the prices for the furniture it designs and makes for C1? Provide the ONE key reason based on information from the question to justify your answer. [3 marks] D. Would BFC's expected monthly net profit in the month immediately after the loss of C1 as a customer likely to be higher OR lower OR the same, compared to its monthly profit before C1 filed for bankruptcy? Explain. Calculations are not required. Assume macroeconomic conditions, the number of customers BFC has, and the profitability of its customers remain unchanged between these two months. [3 marks] E. Would BFCs expected monthly net profit in 12 months after the loss of C1 as a customer likely to be higher OR lower OR the same compared to its monthly profit before C1 filed for bankruptcy? If the answer to this question is 'it depends', then clearly state and explain the factor that would affect the answer to this question using specific information from the question. Calculations are not required. Assume macroeconomic conditions and the profitability of its existing customers remain unchanged over these 12 months. [3 marks] F. Would your answer to Part E change if BFC's factory is operating below capacity? Explain. [3 marks]
