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) oProfit 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. oThis 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) oThis 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 $650 x 4% = $26 Additional Labor for 2,450 units = 2,450 x $26 = $63,700 / 8,200 units = $7. 77 per Unit Direct Materials Cost $650 x 1% = $6. 50 Additional Overhead $650 x 1% = $6. 50 Additional Property Tax $650 x 1. % = $9. 75 Total Additional Var. Cost = $7. 77 + $6. 50 + $6. 50 + $9. 75 = $30. 52 APPENDIX 2 Carrying Cost for Private Label Accounts Receivable A/R Turnover Rate = 365 / 45 = 8. 1 8,200 units x $617. 50 = $5,063,500 / 8. 1 = 625,123. 46 x 9. 5% = $59,386. 73 Inventory Inv. Turnover Rate = 5. 8 Average Inv. = 2,100 units Unit Cost = $583. 52 2,100 units x $583. 52 = $1,225,392 x 9. 5% = $116,412. 24 Total Carrying Cost = A/R + Inv. = $175,798. 97 APPENDIX 3 Cannibalization SMC mower = $650 – $553 = $97 Contribution Per Unit Units Lost = 300 $97 x 300 = ($29,100)