WPS Office F22 MOG1001 Ca.iving.docx.pdf W F22 MOG1001 Ca.ge Living.docx X + 21 RU Go Premium - 5X =Menu A 2 6 0 6 5 . C Home Insert Page Layout References Review View Section Tools Q Click to find commands Case Study - Cottage Living > The Situation: James White, an entrepreneur from Bracebridge, Ontario owns a company called Cottage Living that manufactures outdoor lounge chairs commonly referred to as 'Muskoka chairs'. These chairs are made from a very high quality composite wood and are considered a premium product in the outdoor furniture market. Cottage Living ships 70% of their manufactured chairs to various outdoor furniture retailers across Canada and the northern parts of the United States. They also operate a seasonal 'flagship' store in Bracebridge where they sell 30% of their manufactured chairs during the summer. In 2021, the retail price in their store has been set at $430 CAD. Cottage Living has agreements with all of the other outdoor furniture retailers that they supply chairs to where they must match the Bracebridge retail store price. In exchange, Cottage Living supplies chairs to these retailers at $150 below the current retail price. Over the past two years there has been substantial growth in the demand for premium outdoor living products. There has also been a steady increase in the number of suppliers of premium 'Muskoka Chairs' throughout Ontario and North America who sell products that are very similar. The industry could best be described as ' mananalistin' ishard anthard in alight woodint differentiation manishines and mallor and " Page: 1/7 Words: 313/2382 Spell Check 158% - - + 25 C ENG 9:04 PM Sunny (DELL US 2022-07-30 22wps Ofce .FZZ MOG100'ICa...ivmg.docK.pdf Hrzz MOG1DD1Ca..ge megdm X + 2 I o @611 Premium 7 13 x : Menu E7 {3] '3 ED! @ 6 '3' C' c @ Insert PageLayuut Rererences Review View Section Tuuls chicktond commands 8+ 5 Ev El 5 v Ontario and North America who sell products that are very similar. The industry could best be described as 0 'monopolistic' where as there is slight product differentiation, many buyers and sellers, and no one company 'I' has much control or power in the overall market. 42 In an attempt to increase overall profitability, Mr. White is considering expanding the manufacturing capacity of % Cottage Living. To make sure that he would be able to sell the additional units at the market price he is also 3' considering changing the way that he compensates his sales team. 5) Your Task: ' E Mr. White previously hired a group of consultants who had started collecting and analyzing some data. However, 0 due to a personal disagreement he has decided to go in another direction. Based on your reputation as an expert in managerial economics, he has hired you and your team to take over the project. The previous data is available to you but you need to finish the analysis and determine a business strategy that can increase Cottage Living's profitability while also managing risk. He would like you to present your findings and recommendations in a brief report. The report needs to include the following mg: 1. A market analysis and prediction for the overall market price of premium composite W chairs 2. A net present value analysis of the proposed manufacturing expansion and a final recommendation on expansion . 3. A proposal for a new compensation plan for his sales team S Page: 1/7 Wurds:313/2382 Spell Check ' ' 2:! la :5 l ' :0: 158% ' 4'0 + 3: 023:. E: D u o : e a e z? e: A ea we 2.23:2;fo WPS Office F22 MOG1001 Ca.iving.docx.pdf W F22 MOG1001 Ca...ge Living.docx X + 21 RJ Go Premium - 5X =Menu A 2 6 0 6 5 . C Home Insert Page Layout References Review View Section Tools Click to find commands Market Supply and Demand: > For 2021, Cottage Living is expecting final sales to be 50,000 units (100% of the units manufactured). The previous consultants had collected and studied market data for Cottage Living's sales region and approximated the total market demand and supply schedules for high quality composite Muskoka chairs in 2021: Price Demand Supply $280 1,500,000 100,000 $310 1,400,000 200,000 $340 1,300,000 400,000 $370 1,200,000 600,000 $400 1,100,000 800,000 $430 1,000,000 1,000,000 $460 900,000 1,200,000 $490 800,000 1,400,000 $530 700,000 1,600,000 1 4 14 0 Mr White fanle this analysis is reasonable siuAn that all comnotitAre ales haun a calling Arion unnu alARA to CA20 Page: 2/7 Words: 313/2382 Spell Check 02 8 06 158% - - + 25 C Sunny OLDFe (DELL W ENG 9:05 PM US 2022-07-30 22.FZZMOG'IOO'ICa...ivmg.docx.pdf7 HrzzMomDmCaugemegdm X + 2| o @GuPremium 7 13 X :Menu E7 {3] 7g [Ell @ 6 '3' C' c @ Insert Page Layout Rererences Review View Section Tools chicktond commands 8+ 5 Ev El 5 v saw IUU,UUU 1,bUU,UUU 0 Mr. White feels this analysis is reasonable given that all competitors also have a selling price very close to $430 and since the average variable production costs for Cottage Living chairs is $200 per chair in the current DDWK Bracebridge facility it would make sense that market supply would be very low at a retail price of $280. SJ The previous consultants determined that for the next 3 years (2022, 2023, and 2024). There were 3 equally likely scenarios for the market supply and demand: Worst Case: The increased demand for 'outdoor living' products in 2019 and 2020 could have been (BEEN largely due to the unique conditions created by the pandemic. If this is the case they expect that the 2022 demand for composite Muskoka chairs will fall by 600,000 units at every price level and remain at those levels until 2024. Moderate Case: The increased demand for 'outdoor living' products in 2019 and 2020 could have been part of a longer term trend for consumers and was possibly not affected by the pandemic. If this is the case they expect that 2022 demand will stay roughly at 2021 levels until 2024. Best Case: The increased demand for 'outdoor living' products in 2019 and 2020 could have been part of a longer term trend for consumers and may have been negatively affected by the pandemic. If this is the case they expect that demand will increase by 500,000 units at every price level and remain at those levels until 2024. In this scenario it would be likely that supply was also negatively affected by the pandemic and therefore market supply would also quickly increase in 2022 by 200,000 units at every price level and remain at these levels until 2024. a. Page12/7 Word5:313/2382 v Spellcheck r 3 IE 15 l v [D]153%- 4.0 + 3: oi. E: D u o : e a e z? e: A e we 2.231%:fo WPS Office F22 MOG 1001 Ca.iving.docx.pdf W F22 MOG1001 Ca..ge Living.docx X + 21 RJ Go Premium - 5X =Menu GA 2 6 0 6 5 . C Home Insert Page Layout References Review View Section Tools . Click to find commands Given the competitive nature of the industry Cottage Living has very limited price control and they will set their > prices at the market rate for 2022-24. Mr. White needs you to determine the market price for premium, composite Muskoka Chairs for 2022-24. Capital Investments Production Process and Costs: Mr. White is considering temporarily increasing his manufacturing capacity to a maximum of an additional 50,000 units in 2022 by opening a small secondary facility in Bracebridge. The expected life of this temporary new facility would be 3 years (2022-24) with no expected salvage value of the facility or the equipment. For the expansion Cottage Living would need to invest $8,000,000 by the end of 2021. Given Cottage Living will not be selling chairs above market price he believes he should be able to sell all of the additional units (as long as he can motivate his sales team) at the same mix of 70% to other retailers and 30% in their Bracebridge store. The previous consultants had provided this unfinished chart below for 5 different output options that needs to be completed: Output Marginal Total Average Expected Total Revenue Total Profit Variable Cost | Variable Cost Variable Cost / Selling Price / Unit Unit 10,000 $3,500,000 $3,500,000 20,000 $2,000,000 Page: 3/7 Words: 313/2382 Spell Check 0 158% - - + 25.C ENG 9:05 PM Sunny W US 2022-07-30 22WPS Office F22 MOG 1001 Ca.iving.docx.pdf W F22 MOG1001 Ca...ge Living.docx X + 21 RJ Go Premium - 5X =Menu A 2 6 0 5 5 . C Home Insert Page Layout References Review View Section Tools Q Click to find commands Output Marginal Total Average Expected Total Revenue Total Profit > Variable Cost Variable Cost Variable Cost / Selling Price / Unit Unit 10,000 $3,500,000 $3,500,000 20,000 $2,000,000 30,000 $7,000,000 40,000 $9,000,000 50,000 $3,500,000 Cottage Living would be financing the investment through a bank loan. The current cost to borrow for Cottage Living is 6%. Mr. White needs you to find which of the 5 output options maximizes profit at the new facility and then determine if the net present value of this investment is worth proceeding with the expansion. Sales Team Compensation: If Mr. White proceeds with the manufacturing expansion he feels he will need to alter the current compensation package for his sales team in order to make sure Cottage Living can sell the additional units at market price. In an attempt to retain talented salespeople he has previously offered a very competitive yearly salary of $70,000 1 4 plus benefits and 4 weeks paid vacation. This pay structure has worked well in the past to attract loyal 14 0 amnlounge and to create a nacitive work environment at Cottage living There are currently 5 normanent Page: 3/7 |Words: 313/2382 Spell Check 0 2 8 0 0 158% - - + 25 C ENG 9:06 PM Sunny OLD DELL O US 2022-07-30 22WPS Office 2 F22 MOG 1001 Ca.iving.docx.pdf W F22 MOG1001 Ca..ge Living.docx X + 21 RJ Go Premium - 5X =Menu GA 2 6 0 5 . C Home Insert Page Layout References Review View Section Tools . Click to find commands 203 9 :V an attempt to retain talented salespeople he has previously offered a very competitive yearly salary of $70,000 plus benefits and 4 weeks paid vacation. This pay structure has worked well in the past to attract loyal > employees and to create a positive work environment at Cottage Living. There are currently 5 permanent salespeople. However, given how strong demand in 2019 and 2020 for Cottage Living products has been Mr. White feels that his sales team has been lacking motivation. They have also been taking their vacations during high demand months from May-August (he is not interested in dictating when people take their vacation). He is worried that if there is an increase in Cottage Living's inventory, the poor sales habits that his team has picked up during the pandemic may negatively affect future sales. He would like you to create a new compensation package plan that he can then present to his employees. He is willing to compensate his employees slightly more on average, but he would like to make sure it provides motivation for them to each increase their average sales volume to ensure he is able to sell all of the additional units. Page: 4/7 Words: 313/2382 Spell Check 0 2 8 306 158 - - + 25 C ENG 9:06 PM Sunny T W US 2022-07-30 22WPS Office F22 MOG 1001 Ca.iving.docx.pdf W F22 MOG1001 Ca..ge Living.docx X + 21 R Go Premium - 5X =Menu GA 2 6 0 6 5 - C Home Insert Page Layout References Review View Section Tools Q Click to find commands salespeople. > However, given how strong demand in 2019 and 2020 for Cottage Living products has been Mr. White feels that his sales team has been lacking motivation. They have also been taking their vacations during high demand months from May-August (he is not interested in dictating when people take their vacation). He is worried that if there is an increase in Cottage Living's inventory, the poor sales habits that his team has picked up during the pandemic may negatively affect future sales. He would like you to create a new compensation package plan that he can then present to his employees. He is willing to compensate his employees slightly more on average, but he would like to make sure it provides motivation for them to each increase their average sales volume to ensure he is able to sell all of the additional units. He will need his employees to voluntarily agree to this so he would like you to help present the information to them in a way that shows different scenarios and how the new package can benefit them for their hard work, 1 4 while not disrupting the positive culture that currently exists at Cottage Living. 14 0 Page: 4/7 Words: 313/2382 Spell Check 0 2 8 06 158% - - + 25.C ENG 9:06 PM Sunny W US 2022-07-30 22