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Masterton Carpet

Masterton Carpet

Given recent developments within the floor covering industry, Masterton Carpet Mills, Inc., which is a privately held manufacturer of medium to high priced carpet, is considering the possibility to establishing their own distribution centers or wholesale operations focusing on residential business in an effort to maximize profits.

Option #1: Do Nothing (i.e. don’t change anything)

Currently, Masterton Carpet Mills, Inc. is lagging behind in sales growth, but is continuing to remain profitable. They are a small manufacturer in a large, highly competitive industry. The first option they have is to do nothing and continue to use their current wholesale distribution method currently being utilized. According the information that was given in this case, the following criteria have been evaluated to achieve the total estimated wholesale distribution cost of approximately $15.4M; wholesaler margins, cost of servicing wholesalers, and the accounts receiving carrying costs. Through a 20% wholesale markup, there is currently $10.8M spent at the wholesale level. The margin of $10.8M paid out to wholesalers could be retained by Masterton Carpet Mills, Inc. to fund the change in the distribution channel using internal capital. This would satisfy conditions set forth by Robert Meadows, President of Masterton Carpet Mills, Inc. and company policy to finance programs from internal funds. The cost of servicing the current wholesalers is approximately $3.2M, which is 6% of sales ($54M * 6% = $3.240M) Given that it typically takes 90 days from Masterton Carpet Mills, Inc. to collect its retail account receivable and that accounts receivable carrying costs are 10% of sales, the total cost is $1,350,000. If Masterton Carpet Mills, Inc. continues the use of wholesalers, approximately $15.4M will continue to be spent in that segment of the distribution channel.

Option #2: Establish its own distribution centers or wholesale operations for residential businesses.

Using criteria such as warehouse expenses, salaries of sales representatives and sales managers, costs of sales administration, inventory carrying costs, accounts receivable, carrying costs and transportation expenses the estimates costs for this endeavor total approximately $17.4M. Expenses for one warehouse located in each of the seven metropolitan areas (Houston, Chicago, Denver, Los Angeles, New York City, Philadelphia and Richmond) is calculated to be $700,000 each and total warehouse expenses are expected to be $4,900,000 ($700K * 7 =$4.9M). If Masterton Carpet Mills, Inc. maintains the same retail proliferation currently offered through the wholesale cannel presently used, $4,900,000 should be spent on the salaries of 70 sales representatives and an additional $560,000 should be spent on the salaries of 7 overseeing managers if each sales manager manages eight individual sales representatives. The total spent on sales administration, which is 40% of the salaries of the total sales force and management costs per year, total $2,184,000 ($4,900,000 + $560,000 = $5,660,000 * 40% = $2,184,000). The cost to carry inventory and account receivable total 10% each of sales. With the current desired inventory turnover rate of 4 times per year, inventory carry costs would total $1,350,000 and accounts receivable carry cost would be $1,350,000. Transportation expenses equal 4% of sales and total $2,700,000. The total estimated costs of Masterton Carpet Mills, Inc.’s movement into direct distribution would be slightly more expensive, with approximately $17.4M spent in the distribution to retail accounts, than maintaining the current wholesale distribution.

After reviewing the quantitative and qualitative information presented in this case, and assuming my calculations are correct, I would recommend that the company go forward with establishing their own distribution centers or wholesale operations. According to the Company’s June 30, 2000 Financial Statement, the company has approximately $27 Million in current assets. Assuming that a portion of their current assets is in the form of cash, the company could front the $17.4 Million and retain the $15.4 Million that would normally be spent on their current wholesale strategy, therefore only costing the company approximately $2 Million more than status quo for this endeavor. This option would also allow Masterton Carpet Mills, Inc. more stability due to the lack of intermediary conflict and instability within the external environment. Also, the company should be able to build economies of scale after a couple years, which would lower this $2 Million differential per year.

Cost of Servicing $ 3,240,000.00

Accounting Receiving Carrying Cost $ 1,350,000.00

Total Not changing anything $15,390,000.00

Option #2: Establish its own distribution centers or wholesale operations for residential businesses.

Salaries of Sales Reps $ 4,900,000.00

Salaries of Managers $ 560,000.00

Cost of Sales Admin $ 2,184,000.00

Inventory Carrying Cost $ 1,350,000.00

Transportation exp. $ 2,160,000.00


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