*Key Events / Case Synopsis- Maximum of six (6) sentences here. Provide a brief history of the company, industry, keyplayers, and relevant issues up to the time of the decision/problem.*Problem...

Sales income 1 THE FILMORE FURNITURE COMPANY Over the past few years, Mr. John Filmore, owner of the Filmore Furniture Company, has grown increasingly concerned over the performance of the company’s chairs division, which is located near Peterborough, Ontario. The company is well-established and enjoys a good reputation and good relationships with its retailers. However, sales of the company’s chairs in 2018 were no higher than three years earlier, and profits have declined by nearly 24%, from $340,000 in 2015 to $260,000 in 2018, as the following comparative income statements show. FILMORE FURNITURE COMPANY CHAIRS DIVISION INCOME STATEMENT ($ thousands) 2015 2016 2017 2018 Revenues $3,600 $3,620 $3,630 $3,610 Cost of Goods Sold: Opening inventory 350 370 400 430 Materials 1,290 1,300 1,300 1,290 Labour 1,270 1,320 1,340 1,380 - Closing inventory 370 400 430 490 2,540 2,590 2,610 2,610 Gross profit 1,060 1,030 1,020 1,000 Fixed Expenses: Salaries 300 300 310 320 Marketing 250 250 260 270 General & Admin 170 170 170 150 Total 720 720 740 740 Operating Profit 340 310 280 260 Note: all financial statements presented in this case are included in the EXCEL file “Case 5 - Filmore excel sheet (2019)” The Industry and Economic Environment In the early 1990s, the Canadian furniture industry suffered from a combination of economic recession and growing import competition. After 1994, conditions improved as the economy recovered and the decline in the Canadian dollar made imports more 2 expensive. Nonetheless, through the 2000’s sales growth in general has been relatively slow (3% to 5% annually), and competition from both domestic and foreign producers very strong. Several Canadian furniture manufacturers closed, while others had used the breathing space provided by the low Canadian dollar to reposition themselves in the market and to improve efficiency in preparation for the increased competition that is expected in the future. Then the 2016 election of Donald Trump as President of the United States plunged the industry into uncertainty again. Trump had stated that protection of jobs in the US furniture industry was a priority. The renegotiation of the free trade agreement among Canada, Mexico, and the US was also causing concern in the Canadian industry. Finally, in a desperate ploy for re-election, the Ontario Liberals had increased the minimum wage by 30%, from $11.60 to $15.00 per hour. Since approximately one-third of Filmore’s workers earned the minimum wage, this had an adverse impact on the Company’s labour expenses. The Chair Division The Peterborough plant of Filmore Furniture has a skilled work force that is quite loyal to the company, mainly because it provides reasonably steady employment in an area where much employment is seasonal and unemployment is high. The plant produces three basic models of chairs, in a variety of colours, finishes and fabrics. The “Filmore” model is one of the company’s original designs, a standard model that has always sold reasonably well, and remained the Division’s second best-selling chair. The market for this type of chair has been growing slowly but steadily in recent years, and while no “official” market share statistics exist, Filmore’s sales representatives report that the company appears to be holding onto its share of this market. As a result, sales of the “Filmore” have been rising slowly but steadily. Due to the design of the “Filmore”, its production involves an above-average amount of labour. 3 The “Caledonia” model is a more modern design of a type that has sold very well in recent years.. In this briskly-growing market, Filmore Furniture has done unexpectedly well, obtaining a growing share of the market even in the face of competition from IKEA’s popular “Sundin” model. In fact, sales have been so brisk that on several occasions, the “Caledonia” has been on backorder, and retailers have had to wait several weeks for deliveries. Production of the “Caledonia” requires less labour than the other models, primarily due to the use of modern wood-forming machines that the company imported from Norway in the early 2000s, at a cost of $250,000. The plant foreman and woodworkers agree that this equipment could be modified to use in the production of the “Filmore” model; however, this has not been done. The company has needed all the machines it has for production of the “Caledonia” chair, and its declining profits and heavy debt load have made management reluctant to spend on more equipment or on expansion of the plant. In fact, John Filmore had stated that no capital investment could be made unless its payback period was two years or less. Even then, the expenditure would be closely scrutinized. The “Parkdale” model is a traditional stuffed armchair design that the company has produced since it was established. It is a personal favourite of John Filmore’s mother, who together with John’s father founded the company. However, as styles have changed, the market for this type of furniture has decreased in recent years, and Filmore’s sales representatives report that the company’s share of this market has also been declining. Over the past two years, the company’s inventories of this model have risen as retailers have reduced their orders. The production of this model involves two steps. First, there is the construction of the wooden frame in much the same way as the other models by the company’s woodworkers, who are on a job rotation system that moves them from model to model. This is followed by the addition of the upholstery by skilled workers. As a result, the production of the “Parkdale” model requires more labour than the other models. In order to retain skilled upholsterers, in recent years the company had to increase their wage rates more rapidly than those of other plant employees, who have felt that they were being treated unfairly. By the end of 2018, John Filmore had grown quite concerned about the future of the company’s chairs division. On the suggestion of a consultant, the company’s income statements for the past four years were broken down in an attempt to determine the revenues and costs for each of the three models. For manufacturing costs, this could be done quite precisely, as the following statements show. For fixed expenses (aka overhead or S,G,&A), this was not possible, so these were simply allocated to each model according to that model’s percentage of sales revenues – for instance, since the “Caledonia” accounted for 36% of 1998 sales, 36% of non-manufacturing expenses ($740,000 in total) were attributed to it. The allocation was arbitrary, but no-one had suggested a better method of dealing with overhead costs. This allowed the revenues and costs for each of the company’s three models of chairs to be identified, as shown on the following pages. 4 On the basis of this information and the information provided in the foregoing, what would you recommend that management do concerning the chair division of the company? 5 REVENUES & COSTS “CALEDONIA” MODEL ($ thousands) 2015 2016 2017 2018 Revenues $1,000 $1,080 $1,180 $1,300 Cost of Goods Sold: Opening inventory 100 100 100 90 Materials 360 390 430 470 Labour 290 300 310 330 - Closing inventory 100 100 90 100 650 690 750 790 Gross profit 350 390 430 510 Fixed Overhead: (prorated by sales) 200 220 240 270 Operating Profit 150 170 190 240 “FILMORE” MODEL ($ thousands) 2015 2016 2017 2018 Revenues $1,200 $1,220 $1,250 $1,280 Cost of Goods Sold: Opening inventory 120 130 140 150 Materials 430 440 440 450 Labour 420 440 470 510 - Closing inventory 130 140 150 160 840 870 900 950 Gross profit 360 350 350 330 Fixed Overhead: (prorated by sales) 240 240 260 260 Operating Profit 120 110 90 70 6 “PARKDALE” MODEL ($ thousands) 2015 2016 2017 2018 Revenues $1,400 $1,320 $1,200 $1,030 Cost of Goods Sold: Opening inventory 130 140 160 190 Materials 500 470 430 370 Labour 560 580 560 540 - Closing inventory