Swisher Mower and Machine Company (Smc)
RECOMMENDATION:
Swisher Mower and Machine Company should reject the offer to produce the Private-Label brand.
RATIONALE:
• Standard Riding Mower contribution per unit would drop from $97 to $33.98, which is $63.02 per mower. (Appendix 4)
• Contribution Margin would drop from 14.92% to 5.5%, which is 9.42%. (Appendix 4)
• Swisher Mower would only profit $62,819 from producing the 8,200 units in the Private-Label in the first full year of production. (Appendix 5) o Profit per mower is only $7.66 per unit.
• Cannibalization of SMC current mower is ($29,000) loss from the private-label brand. Plus, the loss of additional smaller independent dealer in the future since there will be an overlap in trade areas. (Appendix 3)
• SMC will incur additional labor cost on 2,450 units because the factory is already at full capacity. o This results in additional $63,700 overtime labor cost, which is $7.77 per unit. (Appendix 1)
• With the increase in labor, materials, overhead, and property tax, the additional variable cost is $30.52 per unit. (Appendix 1) o This brings the total variable cost to $583.52. (Appendix 4)
• SMC will only be making $7.66 per mower, and the company wants them to pay $22 per hour for any maintenance on a mower under warranty. Therefore SMC would have to sell 3 additional mowers to cover each hour work done to a mower under warranty.
• The accounts receivable and inventory carrying cost for the private-label brand is $175,789.97, $59,386.73 and $116,412.24 respectively. (Appendix 2)
• The image of company would be altered since SMC would double their sales with one private-label product. Since the company has a reputation of being small and personal introducing the private-label could be detrimental to their current business.
• Remain status quo and on average increase profit by 10% and continue to widen the breathe of the product lines, Trim-Max.
APPENDICES
APPENDIX 1
Incremental Cost for Private Label
Direct Labor Cost
Swisher Mower and Machine Company should reject the offer to produce the Private-Label brand.
RATIONALE:
• Standard Riding Mower contribution per unit would drop from $97 to $33.98, which is $63.02 per mower. (Appendix 4)
• Contribution Margin would drop from 14.92% to 5.5%, which is 9.42%. (Appendix 4)
• Swisher Mower would only profit $62,819 from producing the 8,200 units in the Private-Label in the first full year of production. (Appendix 5) o Profit per mower is only $7.66 per unit.
• Cannibalization of SMC current mower is ($29,000) loss from the private-label brand. Plus, the loss of additional smaller independent dealer in the future since there will be an overlap in trade areas. (Appendix 3)
• SMC will incur additional labor cost on 2,450 units because the factory is already at full capacity. o This results in additional $63,700 overtime labor cost, which is $7.77 per unit. (Appendix 1)
• With the increase in labor, materials, overhead, and property tax, the additional variable cost is $30.52 per unit. (Appendix 1) o This brings the total variable cost to $583.52. (Appendix 4)
• SMC will only be making $7.66 per mower, and the company wants them to pay $22 per hour for any maintenance on a mower under warranty. Therefore SMC would have to sell 3 additional mowers to cover each hour work done to a mower under warranty.
• The accounts receivable and inventory carrying cost for the private-label brand is $175,789.97, $59,386.73 and $116,412.24 respectively. (Appendix 2)
• The image of company would be altered since SMC would double their sales with one private-label product. Since the company has a reputation of being small and personal introducing the private-label could be detrimental to their current business.
• Remain status quo and on average increase profit by 10% and continue to widen the breathe of the product lines, Trim-Max.
APPENDICES
APPENDIX 1
Incremental Cost for Private Label
Direct Labor Cost