Oldfield’s Holdings is a consolidated group which has invested into more than just the painting equipment industry where it originated. The three products chosen to be included in this step are the base unit scaffolding, a renovator wall brush as well as a 3.07m garden shed. At first, it was difficult to find products to evaluate/analyse as Oldfield’s is a wholesaler but using the ‘shop online’ feature of its clients, I was able to identify their sale prices based on numerous assumptions. This was vital in identifying the contribution margin for my firm. Contribution margin can then be expressed as: Sales (S) - Variable Costs (VC) as if refers to the amount each dollar sales of a base unit contributes to covering a firm’s fixed costs and contributing to profits. In terms of variable costs, each product comes from a different sector of the company and therefore the production levels differ between each as well as the amount of materials used. These assumptions can be seen below. Fixed costs on the other hand, are those paid by Oldfield’s Holdings, independent of their business activities. As an example, these are salary fees paid to employees, advertising material, their lease, and repayments on borrowings made to Westpac.
- Base Unit Scaffolding
For the sale price of the product, it can be based on the price that the company listed on their website at current ($1,210.00). This is based on the figures in the hyperlink here: http://www.oldfields.com.au/scaffolding/. From this point, I can then establish the variable costs of the product, as well as the contribution margins. Variable Costs for Advance Scaffolding are those that changed depending on the level of output that is to occur. These could include:
- Production supplies. Things like machinery oil are consumed based on the amount of machinery usage, so these costs vary with production volume.
With this information, it has now estimated with assumption that the contributing margin of a based unit scaffolding product would be $560 ($1210 (S)-$650 (VC)).
2. Renovator Wall Brush
The sale price of this painting product is based on an assumption that when Oldfield’s sold these products, Masters added a mark-up to their own price. The Master’s price can be found here: https://www.masters.com.au/product/100763152/oldfields-renovator-wall-brush-88mm. My calculations from here are based on Master’s using a 65% mark-up on their product lines where the wholesale price from my firm would have been at $6.63 ($18.95 retail x 35% = $6.632). This estimate is based on statistics produced by the Australian Bureau of statistics is saying that this is the average mark-up for all retail and wholesale goods in the country in their most recent study (http://www.smh.com.au/business/markup-tables-20110524-1f1ga.html). It is also used in the calculation of the sale price for product number three.
Variable Costs for this product could include:
- Distribution expenses such as freight out. A business incurs a shipping cost when it sells and ships out a product to Masters.
- Production supplies. Things like machinery oil are consumed based on the amount of machinery usage, so these costs vary with production volume.
- Packaging of the product
Based on the identification of these costs, I can then calculate the contribution margin of the renovator wall brush to be $3.63 ($6.63 (S)- $3.00 (VC)).
- Garden Shed
Variable Costs for this product could include:
- Production supplies. Things like machinery oil are consumed based on the amount of machinery usage, or the amount of metal used, so these costs vary with production volume.
Given these factors, I have made the assumption that the contribution margin for the garden shed will be $147.30 ($237.30 (S) – $90 (VC)).
Discussion of Contribution Margins
Why might these contribution margins be different or similar for my firm? Why might your firm produce a range of products/services with different contribution margins? Why not only produce the product/service with the highest contribution margin?
These margins differ for Oldfield’s as the costs/figures listed above change between each of its sectors. The value of each of these products vary based on the costs of production as well as the demand for such an item thus impacted on the price the company is willing to sell for. It is a marketing concept. I can see from the formula that the main reason for these margins to differ is based on the fluctuation of variable costs. In such sectors as the scaffolding industry, product demand can be greater than that of the paintbrush due to less competition in the market. Variable costs are based on levels production which can change depending on the manufacturing processes each product incurs. Producing only the products which the highest contribution margins would therefore be a bad idea as there would be greater potential for significant losses if demand was to fall.
Market and Resource Constraints for Oldfield’s
Firms face constraints on a daily basis which can impact their resources, production and sales volumes in the market place. Firstly, I find that being a manufacturing company, Oldfield’s would face physical constraints based on machinery and production supplies. In the recent fiscal year, demand in the scaffolding sector has caused a build-up on the running on machines. This means higher contributions to depreciation as a variable cost also causing the company to require more servicing of these assets as well as the need to obtain fuel, oils and fund utilities to function. Because the firm operates in the international market, importing its resources from Asia, it is possible that it has had to deal with increased costs and transit time of imports due to shortages of labour. In terms of a resource constraint, this can cause a deficiency in supplies for Oldfield’s as Oldfield’s may not be producing enough to meet the demands of their consumers at a given time. A plausible legal constraint that can affect the customers of their shed manufacturing department could be the cyclone-proofing standards set by local legislation. In some towns, council approval also includes the need to higher-quality colour bond steel work in the making of garden sheds and like products which means consumers are limited to what they can purchase. This constraint either places pressure on Oldfield’s to impinge larger costs in their production system to meet wind pressures, or lose-out on certain market bases. Lastly, given the large size of garden sheds and scaffolding, there is also a constraint on storage facilities. Demand for such products may be high but unless Oldfield’s can meet these rates in being able to store inventory, it will not be able to produce at the greater equilibrium amount.
In what ways might these constraints be relevant when deciding whether or not (and how much) of the three products or services of your firm that you have identified, your firm should produce and sell?
Although it took me a while to understand this question, I have come to a conclusion. Identifying these constraints will help support decisions made by managers in the protection of them from investing in productions that may not provide adequate contributions to profits. I feel that my firm may need to inflict larger selling prices or incur larger variable costs in order to meet the constraints and break-even.
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