Homestead Corporation Sells a Line of Power Tools to Home

question 45

Essay

Homestead Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company's three largest customers: Weekend Project, Tool Mart, and Fix-It City.
A. 1. Customer-related costs as a percentage of gross margin:
Weekend Project: $245,100 ÷ [($2,000,000 - $100,000) × 30%] = 43%
Tool Mart: $918,000 ÷ [($4,900,000 - $400,000) × 30%] = 68%
Fix-It City: $457,800 ÷ [($4,600,000 - $240,000) × 30%] = 35%
2. Average order size:
Weekend Project: $2,000,000 ÷ 50 orders = $40,000
Tool Mart: $4,900,000 ÷ 175 orders = $28,000
Fix-It City: $4,600,000 ÷ 125 orders = $36,800
3. Ratio of regular orders to rush orders:
Weekend Project: 40:10 = 4:1
Tool Mart: 135:40 = 3.375:1
Fix-It City: 110:15 = 7.33:1
4. Number of sales returns as a percentage of total orders:
Weekend Project: 3 ÷ 50 = 6%
Tool Mart: 20 ÷ 175 = 11.4%
Fix-It City: 8 ÷ 125 = 6.4%
A. For each of the three chains, compute:
1. Total customer-related costs as a percentage of gross margin.
2. The average order size (ignoring sales returns).
3. The ratio of regular orders to rush orders.
4. The number of sales returns as a percentage of the number of total orders.
B. Customer-related costs are driven by events (and costs) directly traceable to clients. In this case, Tool Mart's costs as a percentage of gross margin are much higher (68%) than those of Weekend Project and Fix-It City. This result is not surprising given that the firm creates a large number of small orders ($28,000 vs. $36,800 and $40,000) for Homestead to process. In addition, relative to the other two firms, Tool Mart depends more heavily on rush orders, which likely creates additional cost. Finally, a number of Tool Mart's orders (11.4%) eventually result in sales returns, again creating additional processing expense for Homestead. In summary, Tool Mart seems to be an outlier in relation to Weekend Project and Fix-It City, and management should approach Tool Mart to see if the company can change its ways of doing business.
B. Prepare a brief summary of your findings. Should Homestead work with any of the chains in an effort to improve results? Explain.

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Definitions:

Diffusion

The process by which a cultural element is transmitted from one group or individual to another over time and space.

European Goods

Products and items produced in Europe, often traded to other parts of the world throughout history, significantly impacting global trade networks and indigenous cultures.

Northern Plains

A vast geographical area in the United States known for its flat terrain, grasslands, and significant historical and environmental importance.

Trade

The process of purchasing, selling, or trading goods and services among individuals or nations.