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... Support to Above Financial Analysis Note (a) Sales Current manufacturer's list price of $ 650 @ 5 % discount = $ 617. 50 @ sales volume of 8, 200 units / year. Note (b) Cost of Goods Sold (COGS) Unit COGS of $ 601. 75 = Current COGS of $ 553 plus additional costs of 7. 5 % of current sales price. Note (c) Lost in King Ride Gross Profit Loss of 300 units per year @ $ 650 Sales Price @ 15 % Gross Profit.
Note (d) Lost in Independent Dealers Profit Current distributors sales (or 55 % of 1995 total Sales) @ $ 650 Sales Price @ 15 % Gross Profit, and assuming sales loss of 5 %. Note (e) Increase in Parts Business Profit Assuming 25 years products life cycle, 1995 sales revenue for parts business is based on products sold from 1971 to 1995. This gives parts sales of $ 7. 40 per mower that had been sold. Using the same analogy and using 1995 gross profit margin of 24 %, parts sales in Year n will be based on mowers sold from Year 1 to Year n- 1 at the rate of $ 7. 40 per mower. Note (f) Financing Costs - Inventory Sixty days inventory (or average of 1367 units / year) @ 601. 75 COGS @ 9. 5 % financing costs. Assume no change in inventory turnover and aim to ship finished goods immediately to chain's regional warehouse upon completion.
Note (g) Financing Costs Accounts Receivables Current Accounts Receivable days of 45 days (or average of $ 624 / 267 / year) @ 9. 5 % financing costs. Note (h) One-time Costs Average of $ 10, 000 and $ 12, 000, to be recovered in the first year. Note (i) Increase in Sales and Administration Costs Assume at 10 % of Current Expenses due to savings from sales representatives & advertising. Note (j) Warranty Work Proposed labor cost of $ 22 / hour @ 340 hours / year. The 340 hours / year is arrived at using annual operating hours of 1706 for 8200 mowers (10, 000 mowers at 40 hour / week shift for 52 weeks) @ 20 % warranty rate (assume same as parts business). Note (k) Liability Insurance Assume at 1 % of total revenue since risk is low.
Evaluation of Alternatives Marketing Ride King to Metropolitan Areas Market Ride King Pros Cons Target Metro-polite Expand market segment right product for the right customers (have smaller lawns and prefer more manageable-size mowers) Need to commit resources in expanding distribution network in metropolitan area Target Non-Metro-polite Good 75 % of Smc's sales with existing distribution network Target wrong market segment with Ride King (mid-engine mowers and perceived as less powerful) as customers have bigger lawns and prefer front-engine lawn mowers Pros of Marketing Ride King in Metropolitan Area About 75 % of Smc's sales are currently targeted at non-metropolitan consumers, who have larger mowing areas and prefer front-engine mowers that are perceived to be more powerful. However, its flagship product, Ride King, is a mid-engine model that is not as desirable from consumers perspectives. By re-targeting Ride King at the metropolitan area, whose consumers have smaller lawn area, SMC will be able to enter into a missed frontier and expand its sales in a different market segment. Cons of Marketing Ride King in Metropolitan Area SMC has to commit additional resources to increase the distribution channel in the metropolitan area.
More marketing, advertising and other promotional efforts have to be incurred. Pros of Continuing to Market Ride King in Non-Metropolitan Area SMC has a relatively sound standing in the non-metropolitan area with Ride King mower. Sales are stable, with 75 % of its sales in this market segment. Not much effort is needed to reinforce its market in this segment. Cons of Continuing to Market Ride King in Non-Metropolitan Area As mentioned above, SMC would be missing out a crucial market segment a segment where there is a perfect match between the consumers and the product. Evaluation of Alternatives Introduce / Defer Trim-Max Trim-Max Pros Cons Introduce Target at new market segment consumers in metropolitan area with very small lawns Need to commit resources in expanding distribution network in metropolitan area Defer Consumers perception of new product is unclear SMC may lose out if competitors introduce a similar walk-behind mower first Pros of Introducing Trim-Max Now Trim-Max fits nicely into the market segment in the metropolitan area where consumers have very small lawn area.
SMC should introduce Trim-Max before its competitors. Cons of Introducing Trim-Max Now Similar to the alternative of re-targeting Ride King in the metropolitan area, more resources have to be committed to increase the existing distribution network. Pros of Introducing Trim-Max Later It is unclear how consumers perceive the new product. It may be more worthwhile to spend more time to perform further research (for instance, by conducting surveys) to increase the attractiveness of the product to the target market segment.
Cons of Introducing Trim-Max Later As mentioned, competitors may monopolise the market if they introduce a walk-behind mower before SMC. Evaluation of Alternatives Develop Front-Engine Mower Front-Engine Pros Cons Develop Survey shows that most consumers prefer front-engine mowers Provides existing non-metropolitan consumers with a perceived more powerful engine. Need to commit additional resources (e. g. R& D) Small player in the front-engine market Not to Develop Focus on the mid-engine niche market Forgoing opportunity in high growth market segment Pros of Developing a Front-Engine Mower Consumers in the non-metropolitan area have larger mowing areas and prefer the front-engine mowers, which are perceived to be more powerful.
With 75 % of Smc's current sales being targeted at the non-metropolitan area using a mid-engine mower, there is an obvious mismatch between product and consumers preferences. A front-engine mower should be developed to exploit the potential of this market segment. In addition, the product proliferation offers existing consumers an alternative choice a more powerful engine, or a less powerful one. Cons of Developing a Front-Engine Mower Smc's core competence is in manufacturing mid-engine mowers. By venturing into a new product, more research and development expenses will be incurred.
More time may be needed before SMC is confident of launching a front-engine mower. It may also have to contend with being a small player in the big front-engine mower market. Pros of Not Developing a Front-Engine Mower Although mid-engine mower is not consumers top choice, it is nevertheless a differentiated product with a market...
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