West Lake Home Furnishings Ltd. free essay sample

West Lake Home Furnishings Ltd. Written Analysis and Communication II Instructor Submitted by Section- D 2/08/2008 Date: May 30, 2007 To: Charles Bowman, CEO, West Lake Home Furnishings Ltd. , Ontario, Toronto. From Subject: Advice on whether to accept the offer of reducing the price of signature product to $29. 99 for a year. This report is a summary and analysis of current situation on West Lake Home Furnishings Ltd. (WLHFL) The analysis is based upon the basic objective of economics that is profit maximization. Based upon the present trend of consumer income and preference it is recommended that WLHFL should accept the offer to reduce the unit retail price to $29. 99. As a student of WIMWI, I thank you for providing opportunity to learn about the situation at WLHFL. This has taught me a lot. EXECUTIVE SUMMARY Whether to accept the proposal of one of the retailers, to reduce the price to $29. 99 by WLHFL, thereby boosting the sales, has to be evaluated on the basic objective of economics of a firm. We will write a custom essay sample on West Lake Home Furnishings Ltd. or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The main objective of the firm is to maximize the profit. In order to attain this at retail price of $29. 9, quantity of sales should increase to a substantial level. The present situation at Canada, higher disposable income with Boomer population and reduced price leads to higher demand of quantity are in favour of higher quantity of sales. The proposal ensures the required quantity of sales. Hence, accepting the proposal is recommended. Word Count: 107 Table of content SITUATION ANALYSIS.. 1 THE PROBLEM STATEMENT†¦. OPTIONS 2 CRITERIA FOR EVALUATION 3 EVALUATION OF OPTIONS.. 3 RECOMMENDATION. 6 ACTION PLAN.. EXHIBIT-1†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. i EXHIBIT-2†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã ¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. ii EXHIBIT-3†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. ii EXHIBIT-4†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. iii SITUATION ANALYSIS Outlook of Lighting and light fixtures industry in Canada The market for Lighting and light fixtures in Canada is quiet competitive. There is large number of firms having small market share. Hence, this market can be considered as a Monopolistic competition. Product differentiation enables West Lake Home Furnishings Ltd. WLHFL) to compete with other firms in three areas: product quality, price and marketing. Price plays a major role To have an impact on price, most of the firms have outsourced production to Asia, especially China. There are two new entrants in 2006, implies that still in the market there is scope for earning. Price plays a major role. It is reflected by average prices for home furnishing items had fallen down during 2002 to 2006 but sales had grown at 6. 1% of compounded average growth rate. Consumers in Canada Consumers in Canada are at the Esteem and Aesthetic needs level (see Exhibit 1). Due to which purchases from large â€Å"big-box† retailers get patronized. This makes large retailers in a strategically important position for the manufacturer like WLHFL. Significant trend which is at advantage for the industry is the Baby Boomer; they are now having higher disposable income and demand for home furnishings. Exhibit 2 suggests that Boomers’ earning will peak in 2015 for the Early Boomers (born from 1945 to 1954) at $90,000 per household, and in 2025 for the Late Boomers (born from 1955 through 1964) at $106,000. Present situation of WLHFL Sales Boost Considering the proposal of one of the top three wholesale customers, Sales boost is obvious as WLHFL will get the prominent shelf space. But we need to trade off between boosting sales and reducing retail price of signature product for all businesses. Objective of the firm The main objective should be maximising the profit. To maximize the profit, WLHFL should set a price and quantity where the marginal revenue equals the marginal cost . The exhibit 3 shows the graph for the output and price in long run for a firm in Monopolistic competition. Major hindrance The major hindrance in the cost increments are higher inventory to the tune of $1. 6 million, increase up to 20% in Sales, General, Administrative expenses (SGAE) and increase up to 150% in Shipping and Warehouse. Problem Statement Whether WLHFL should accept the proposal of reducing the retail price of a signature line of decorative lamps from $69. 99 to $29. 99 for a period of one year? Options 1. Accept the proposal to reduce the retail price to $29. 99. 2. Reject the proposal to reduce the retail price to $29. 99. Criteria for Evaluation 1. Profit maximization of WLHFL This is the primary criterion as the implications on the behaviour of the WLHFL can be reasonably accurate and avoid unnecessary analytical implications. 2. Effect on Large Chain Retailer’s relationship After evaluating the primary criterion, evaluating this criterion will have a long term effect on business of WLHFL. 3. Effect on Cash flows of WLHFL for the year 2007 This is a crucial criterion but can be considered only after evaluating the Retailers’ response to the change in unit retail sale price. Evaluation of Options 1. Accept the proposal to reduce the retail price to $29. 9. 1. Profit maximization of WLHFL As shown in the exhibit 3, to attain the profit maximization marginal revenue should be equal to marginal cost. Though, due to lack of complete information about the total demand in Canada for lighting and light fixtures, most of the calculations are approximated. The scenario I suggests that there is considerable increase in the net earnings and hence profit maximization is achieved. 2. Effect on Large chain Retailer’s relationship By accepting the offer, the Retailer who has proposed the offer will continue to do business with us. Consumers generally prefer large retail chains to purchase Home furnishing products, this move will ensure that we remain in the business with good size of market share. The reduced price information to other retailers as well as the consumer will reach in no time. And hence WLHFL will be forced to reduce the retail price not only for the wholesalers but also for consumers, who purchase at retail store and/or via internet. This in turn will have strong positive impact on Cash flow. 3. Effect on Cash flow of WLHFL for the year 2007 Looking at exhibit 4, the cash flow of the company with accepting the offer can result in two scenarios. One, in which the business grows as anticipated and second business grows at reduced anticipated rate. These are shown as Scenario I and Scenario II respectively. It has been observed that Scenario II leads to loss. But, there is an incentive to consider the Scenario I. The high disposable income with Boomer population and reduction in price increases demand for the product ensures that Scenario I is more probable than II. 2. Reject the offer to reduce the retail price t $29. 99. . Profit maximization of WLHFL By rejecting the offer, at present production level of WLHFL is not at the profit maximisation level. That is still there is a possibility of selling more products and maximising profit. There are two new entrants in 2006 which are specifically focusing on this opportunity. Rather than, they grab the opportunity, WLHFL should grab the opportunity. 1. Effect on Large chain Re tailer’s relationship Retailer who made the proposal will be reluctant to provide better shelf space and so do the other retailers, as the volumes provided by WLHFL are not high. Due to this, there is less possibility of reaching to the consumer’s mind. Hence, there is not anticipation of growth in sale in long term. Even there is a possibility that the retailer can purchase directly from Chinese manufacturer which can be availed at cheaper price. Opportunity cost is high, and hence rejection to offer is not recommended. 3. Effect on cash flow of WLHFL for the year 2007 If the WLHFL grows at average 10%, then there is positive cash flow. As retailers will not offer the better shelf space, it is difficult to attain. Also, due to new entrants and/or retailers themselves purchases directly from Chinese manufacturer will force to reduce the price. At this production level, reduction in price means negative cash flow. Recommendation Evaluating the options suggests accepting the proposal of reducing the retail price of a signature line of decorative lamps from $69. 99 to $29. 99 for a period of one year. Action Plan †¢Communicate to the retailer about the acceptance of offer. †¢Communicate to the other retailers about the reduction in price and negotiate on gaining better shelf space, lesser margin and more volume. Keep the working capital ready, to manage the high inventory level. †¢Prepare a projected production quantity and arrange the resources accordingly. Word count: 1098 Exhibit 1: Different stages in need hierarchy. Adapted from Maslow’s Hierarchy Needs. Exhibit 2: Boomers have earned more at every age than prior generations Source: http://www. mckinsey. com/mgi/publicat ions/Impact_Aging_Baby_Boomers/slideshow/ slideshow_2. asp Exhibit 3: Output and Price in the Long run for Monopolistic Competition. Source: Cowell, F A. (Dec. 2004). Microeconomics: Principle and analysis. London school of economics. Exhibit 4: Projected Cash Flow with various Scenario Projected Scenario for year 2007 2006Scenario IScenario IIScenario III Unit sale price of signature product$69. 99$29. 99$29. 99$69. 99 Per unit COGS$30$20$20$30 Sales1 Wholesale8,000,0001665711593005248800000 Store3,000,000750000045000003300000 Internet200,000500000300000220000 COGS27,057,000993879699387967,762,700 Gross Margin41430001471831941617274557300 As a % of Sales36. 99%59. 69%29. 51%36. 99% Sales, General, Adminstrative Expenses3,000,000360000036000003,300,000 Shipping and Warehouse830,00020750002075000913,000 Operating Income313,0009,043,319-1,513,273344,300 Income Tax109,5503,165,1620120,505 Net earnings203,4505,878,157-1,513,273223,795 Scenario IAccept the offer and business grows as anticipated in the proposal Unit sale from Retailor with proposal is 5 times the 2006 values Unit sale from other two retailers is 2. 5 times the 2006 values Retail store revenue growth is 2. 5 times the 2006 values Internet sale is 2. 5 times SGAEincrease by 20% SWincrease by 150% Scenario IIAccept the offer and business grows at reduced rate than anticipated in the proposal Unit sale from Retailor with proposal is 2. times the 2006 values Unit sale from other two retailers is 1. 5 times the 2006 values Retail store revenue growth is 1. 5 times the 2006 values Internet sale is 1. 5 times SGAEIncrease by 20% SW increase by 150% Scenario IIIRejection of offer, 10% growth in Sales and COGS remains the same SGAEIncrease by 10% SW Increase by 10% Assumptions: 1Average unit retail sale price is as Unit sale pric e of signature product 2Due assumption 2, average unit cost has been considered as per unit COGS. Source: West Lake Home Furnishings Ltd. Annual Reports (disguised)

As For Me and My House essays

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