Reference no: EM133167600

After examining the case and forecast worksheet develop a one-page single-spaced memo to Megan suggesting key points she should include in the proposal to her father and uncle. In addition, you should identify possible objections the founders may raise and suggest how she might respond to them. 

Brumster Brothers, Incorporated - Case

Brumster Brothers, Inc., a privately-held company, makes and sells a single product, a high quality backgammon set. The company operates from a single location in Las Vegas, Nevada. The target market is the mid-range player and the backgammon sets are priced at US$200 each, plus shipping. Currently, 90% of sales come from on-line purchases world-wide. The company has a small store attached to its factory which accounts for 10% of sales. Store sales are brisk when backgammon tournaments come to town.

The original business model was to sell sets through backgammon clubs throughout the United States. However, with the emergence of the internet, on-line sales have skyrocketed and sales are now primarily made directly to the end customers. Although backgammon clubs no longer receive a percentage of the sales, Brumster Brothers advertises heavily in individual club newsletters. They also advertise on-line.   

Brumster Brothers is a very small company and Megan Brumster is the company president. Megan's father, Tom, is one of the two original founders. The other founder, Robert, is Megan's uncle. The two brothers, ages 70 and 77, are retired. Megan handles all of the administrative work and other functions normally performed by the president of a company. Strategically, she walks a fine line. She would like to grow the business, but at the same time her father and uncle want to collect any excess cash flow from the business profits rather than reinvest them in the company.

One full-time employee, Peter, operates the store and two part-time production employees work as needed, 52 weeks per year. However, being semi-retired, neither of the production workers is willing to work, on average, more than 32 hours per week. It has been several years since product demand has kept them busy 32 hours per week. Of course, when product demand dictates, they will work less time. In fact, in the last few years summer demand has been so low that there were several weeks when production stopped.

After reviewing the following business reports and spreadsheet, Megan has decided that purchasing new equipment and implementing a marketing plan that raises the price of the product by 20% and increases advertising expenses by 10% will maximize 2018 profitability. She plans to present this proposal in person to her father and uncle for their consideration.

Report 1

2022 Forecast Worksheet for Brumster Brothers, Incorporated

	Purchasing New Equipment			Using Old Equipment
	Marketing Option 1	Marketing Option 2	Marketing Option 3	Marketing Option 1	Marketing Option 2	Marketing Option 3
SALES
Sales Units	2,530	2,200	2,860	2,530	2,200.00	2,860.00
Sales Price	200.00	240.00	180.00	200.00	240.00	180.00
Total Dollar Sales	506,000.00	528,000.00	514,800.00	506,000.00	528,000.00	514,800.00
COST OF GOODS SOLD
Materials	185,069.50	160,930.00	209,209.00	200,629.00	174,460.00	226,798.00
Labor	40,300.00	33,000.00	47,710.00	63,250.00	55,000.00	71,500.00
Fixed Overhead	7,200.00	7,200.00	7,200.00	0.00	0.00	0.00
Variable Overhead	14,421.00	12,540.00	16,302.00	14,421.00	12,540.00	16,302.00
Total Cost of Goods Sold	246,990.50	213,670.00	280,421.00	278,300.00	242,000.00	314,600.00
Gross Profit Margin	259,009.50	314,330.00	234,379.00	227,700.00	286,000.00	200,200.00
EXPENSES
Administrative Expense	87,000.00	87,000.00	87,000.00	87,000.00	87,000.00	87,000.00
Store Operating Expense	21,000.00	21,000.00	21,000.00	21,000.00	21,000.00	21,000.00
Marketing Expense	28,000.00	22,000.00	20,000.00	28,000.00	22,000.00	20,000.00
Internet Payment Services Expense	6,000.00	6,000.00	6,000.00	6,000.00	6,000.00	6,000.00
Existing Interest Expense	2,000.00	2,000.00	2,000.00	2,000.00	2,000.00	2,000.00
New Financing Expense	14,403.00	14,403.00	14,403.00
Total Operating Expenses	158,403.00	152,403.00	150,403.00	144,000.00	138,000.00	136,000.00
Net Profit before Taxes	100,606.50	161,927.00	83,976.00	83,700.00	148,000.00	64,200.00
Taxes	30,181.95	48,578.10	25,192.80	25,110.00	44,400.00	19,260.00
Net Profit after Taxes	70,424.55	113,348.90	58,783.20	58,590.00	103,600.00	44,940.00

Report 2

Brumster Brothers, Incorporated - Marketing Options

After researching the market, the three best marketing options and their anticipated results are outlined below for consideration. All changes identified are forecasts for year 2022.

Marketing Option 1 - Keep price and product features/quality the same and increase advertising by 40%. It is anticipated that the sales volume (units) will increase by 15% over the 2021 level.

Marketing Option 2 - Raise the price of a set by 20%. Increase advertising expenses by 10%. Keep product features/quality the same. It is anticipated that the sales volume (units) will remain unchanged from 2021 levels.

Marketing Option 3 - Decrease the price by 10%. Maintain the current marketing budget and product features/quality.  It is anticipated that sales volume (units) will increase 30% over 2021 levels. 

Report 3

Brumster Brothers, Incorporated - Historical Financial Statements

Income Statement (Years Ending)	12/31/2021	12/31/2020	12/31/2019	12/31/2018
Sales (Net of Shipping)	$440,000	$540,000	$500,000	$600,000
Cost of Goods Sold	$242,000	$297,000	$275,000	$363,000
Gross Profit	$198,000	$243,000	$225,000	$237,000
Administrative Expenses	$87,000	$84,000	$84,000	$79,000
Store Operating Expenses	$21,000	$19,000	$19,000	$18,000
Marketing Expenses	$20,000	$43,200	$40,000	$52,800
Interest Expense (6% of Principal)	$2,000	$1,500	$1,500	$1,500
Internet/Payment Services Expenses	$6,000	$6,000	$6,000	$6,000
Net Income Before Taxes	$62,000	$89,300	$74,500	$79,700
Taxes (30% Rate)	$18,600	$26,790	$22,350	$23,910
Net Income After Taxes	$43,400	$62,510	$52,150	$55,790
Sets Sold	2,200	2,700	2,500	3,300

Balance Sheet (As Of)	12/31/2021
Current Assets
Cash	$100,000
Inventory	$50,000
Long-Term Assets
Land	$50,000
Plant & Equipment (fully depreciated)	$0
Total Assets	$200,000
Current Liabilities - Accounts Payable	$110,000
Long-term Liabilities - Bank Loan	$33,333
Total Liabilities	143,333
Common Stock	$40,000
Retained Earnings	$16,667
Stockholders' Equity	$56,667
Total Liabilities and Stockholders' Equity	$200,000

Report 4

Brumster Brothers, Incorporated - Production Information

The Production Process:

1. Receive raw materials (2 weeks after order is placed)
2. Put raw materials in inventory by type (wood, felt, glue, leather, etc.)
3. Pull required inventory and produce wood frames in 100 unit batches (average excessive waste due to old equipment is 5% of materials)
4. Put frames in wood frame inventory
5. Pull required inventory and produce interior of backgammon set (average excessive waste is 10% of materials)
6. Put completed items in interior finished inventory
7. Pull required inventory and produce exterior of backgammon set (average excessive waste is 10% of materials)
8. Put completed items in exterior finished inventory
9. Conduct final production inspection (defect rework costs should not be considered)
10. Insert checkers and dice
11. Complete final wrapping and boxing for shipping (10% excessive waste in wrapping materials)
12. Place in finished goods inventory (0% shrinkage)
13. Send lot completion slip to accounting to trigger reorder of materials
14. Maintain level of 200 finished sets in inventory

2021 Plant Capacity (9000 units)
Unit Production Components	Current Unit Costs
Purchased and Inspected Dice and Checkers	$11.80
Wood and Framing Materials	$12.00
Interior Materials	$24.00
Exterior Materials	$30.50
Wrapping and Boxing	$1.00
Variable Factory Overhead (Electricity, etc.)	$5.70
Total Non-Labor Cost (Materials/Overhead)	$85.00
Labor (Sean & Samantha work the same hours)	$25.00
Total	$110.00

The possibility of switching to a just-in-time inventory system within the next three months would quickly reduce inventory levels by 40%. The cost of implementing this system would be an $800 expense for each of the three years 2022, 2023 and 2024. Two percent interest can be earned on any resulting increase in cash. 

Report 5

Brumster Brothers, Incorporated - Production Improvement Proposal and Related Financing Options

The existing equipment is very old. In fact, in the accounting records it is fully depreciated. A new equipment package would cost $200,000 and last 25 years with a maintenance agreement included. At the end of 25 years the equipment would have a salvage value of $20,000. With this new equipment, 100% of total excessive production material waste could be eliminated. Also, unit production could be completed in 75% of the production time it currently takes to manufacture a set. Finally, a major advantage is that the new equipment can be used by a person with an intermediate rather than an advanced skill level. 

The cost of the proposed new equipment is so large that only a bank loan can be considered to pay for a proposal to purchase the equipment. The best deal available is a 25-year, 7.25% interest loan with monthly payments. 

Equipment-Related, Personnel, and Loan Proposal Data
Annual Straight-Line Equipment Depreciation	$7,200	A
$200,000 25-Year Bank Loan @ 7.25% Interest - Monthly Payments	$1,446	B
First-Year Amortized Interest Expense on Loan Above (B)	$14,403	C
Sean's Unit Wage Cost	$15.00	D
Samantha's Unit Wage Cost	$10.00	E
Current Productivity (for Sean and Samantha together)	1 Set per Hour	F

Report 6

Brumster Brothers, Incorporated - Human Resource Positions

Sean Rogers, age 70, has worked for the Brumster Brothers Company for the last five years on a part-time basis. Five years ago he retired from a similar company also owned by the two Brumster brothers.  He worked for this other company, Kage Cages Manufacturing, for thirty-five years. Naturally, with so much experience, Sean is the most skilled production employee. He has stated that he finds the work very relaxing, as long as he does not have to face the pressures of periods of heavy production requirements. He needs this job to make ends meet financially. Although he appears to be in good health, he has gone to the hospital two times in the last year, complaining of chest pains. He makes 50% more than the other regular part-timer and does not receive benefits. He is a loyal employee with a great amount of expertise.

Samantha McKinsey, age 54, is retired from the U.S. Army. She has worked for the company for four years and gets along well with Sean. Although she does enjoy the work, she does not need the money. Samantha sees herself as an apprentice to Sean and continues to learn from him. Sean often helps Samantha with difficult production problems. Having an intermediate skill level, she can only work at the same time as Sean. She enjoys the pressure of heavy production needs and she does not receive benefits.

Peter Wessel, age 25, operates the store. He has worked for the company for two years. Store hours are 10AM - 6PM daily. Although he only makes $16,000 per year, health insurance coverage, provided as part of the job, is very important to him. The store hours are great for Peter because they allow him to work in a casino during the busy evening hours and sleep in a little the following day. Peter has developed a close relationship with Sean.