Swisher Mower Case Summary
Problem In 1996, Swisher Mower and Machine Company (SMC) was faced with a situation which would have the biggest impact on its company since founder Max Swisher received his patent on the gearbox drive assembly. A certified letter from a major national retail merchandise chain outlined a proposal for a two-year contract to provide a private branding business agreement with SMC and its line of riding lawn mowers. In recent years, SMC?s sales and profit figures had reached a plateau far below its all time highest financial figures from 1966. This two-year contractual agreement would provide expanded production in new and existing markets along with the added incentive of broadened distribution in metropolitan areas for SMC. However, the contract
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This determination was calculated based on fixed costs of five percent of 1995 sales. The five percent was derived by subtracting the net profit margin (10%) from the mark-up on the sales price versus variable costs (15%). (See Appendix A) If the proposal from the private brand was accepted, to breakeven in year one, Swisher must sell 8,385 mowers. In year two, 7,623 mowers must be sold. To determine breakeven for the proposal, five percent was subtracted from the Manufactures Retail Price. The private brand proposal stipulated that this must be the price per acquired Road King. Also, variable costs increased by the following: Four percent ($26.00 per unit for overtime costs), one percent ($6.50 per unit for overhead costs), one percent ($6.50 per unit for direct materials costs), and one and a half percent ($9.75 per unit for increases in property taxes). An increase in inventory levels resulted in an increase of fixed costs. On average, an additional 2,100 units of Road King mowers will be in inventory if the proposal is accepted. The inventory increase is financed by short-term debt with an interest cost of prime plus 2.5% (currently 7%). Year one also included a one-time cost of $12,000. This cost would be required if Swisher accepts the proposal. (See Appendix A) A few important non-measurable costs were not included in the cost basis for determining breakeven. This should be dully noted and investigated further before a final decision can be reached. These non-measurable costs include an increase in potential lawsuit liability (the contract stipulates Swisher will be fully liable in the event a negligence lawsuit is filed), an increase in warranty work/repair (the contract stipulates Swisher will be fully responsible for any warranty work/repair and will reimburse the private brand for any labor costs associated with warranty work at $22.00 per hour), and a small
This determination was calculated based on fixed costs of five percent of 1995 sales. The five percent was derived by subtracting the net profit margin (10%) from the mark-up on the sales price versus variable costs (15%). (See Appendix A) If the proposal from the private brand was accepted, to breakeven in year one, Swisher must sell 8,385 mowers. In year two, 7,623 mowers must be sold. To determine breakeven for the proposal, five percent was subtracted from the Manufactures Retail Price. The private brand proposal stipulated that this must be the price per acquired Road King. Also, variable costs increased by the following: Four percent ($26.00 per unit for overtime costs), one percent ($6.50 per unit for overhead costs), one percent ($6.50 per unit for direct materials costs), and one and a half percent ($9.75 per unit for increases in property taxes). An increase in inventory levels resulted in an increase of fixed costs. On average, an additional 2,100 units of Road King mowers will be in inventory if the proposal is accepted. The inventory increase is financed by short-term debt with an interest cost of prime plus 2.5% (currently 7%). Year one also included a one-time cost of $12,000. This cost would be required if Swisher accepts the proposal. (See Appendix A) A few important non-measurable costs were not included in the cost basis for determining breakeven. This should be dully noted and investigated further before a final decision can be reached. These non-measurable costs include an increase in potential lawsuit liability (the contract stipulates Swisher will be fully liable in the event a negligence lawsuit is filed), an increase in warranty work/repair (the contract stipulates Swisher will be fully responsible for any warranty work/repair and will reimburse the private brand for any labor costs associated with warranty work at $22.00 per hour), and a small