Oriole Furniture Inc A Case Solution

1. Does Mente have a problem?

Rattan furniture division was relatively new and had been in place for four years. It had been experiencing a growth of 35% for the last three years. Last year, Rattan furniture sales were around $60 million. Mr. Bernard Mente, the vice president of the division, was responsible for the sales and production activities of the three main product lines; living and dining room line, bedroom line and outdoor patio line.

Mente was required to make a profit plan six months before the beginning of the plan year. Mente prepared a profit plan showing an optimistic sales target of $77,010,000 and a profit of $22,720,000. This plan was submitted to Mr. Mensan, the president of the firm, three months before the start of the plan year. Mensan pressurized Mente to revise the plan to sales of $81,060,000 and profit of $23,900,000.

Five months into the plan year, the performance of the Rattan division did not meet the budgeted targets. The sales and profits were 11% and 18% below the budget, respectively. Even though Mente is uncertain about meeting the target, Mensan is adamant to reach the profit objective. Therefore, Mente has to decide on a move to improve the division’s performance.

2. What is Mente proposing to do?

Mente has to come up with a plan so that he could meet the division’s profit objectives. He has one option of delaying the purchase of new machinery, costing $500,000, which is to be delivered in September. This machinery is expected to replace existing machinery, which often breaks down, and causes late scheduled delivery and increased overtime labor.

Another way that Mente proposed to meet the profit target was is to postpone hiring two furniture designers who both have a salary of $100,000 each.

3. Will this get him the desired profit?

For the first alternative, purchasing the new machinery will increase the expenses as the depreciation of fixed assets increases. If the depreciation expense for the new machinery is not too high, the purchase of the new machinery will not decrease the profitability of the firm. The new machinery purchase will also result in a decrease in overtime labor and late scheduled delivery. Hence, Mente would have to decipher whether the reduction in the cost of labor and deliveries with the purchase of new machinery is higher than the increase in depreciation due to the new machinery. If the new machinery depreciation expense is higher than the reduction in the cost of overtime labor and delivery hours, Mente should not buy the new machinery.

For the second alternative, Mente would have to estimate, in dollar amount, the benefits of employing two new furniture designers. The new furniture designers can produce better designs, which might result in increased sales for the coming months. If the estimated increase in revenue for the remaining year does not outweigh the cost of hiring of $200,000, Mente should either forego the hiring or delay it till the next year. If the designers are hired at the beginning of the next plan year, the benefits of the hire will be more evident in the income statement.

It is difficult to determine whether Mente would be able to reach his desired target based on the limited information disclosed. However, if Mente does the close evaluation of the alternatives, he will realize that the alternatives are not increasing sales or decreasing costs much dramatically to meet the profit target.