solution

Case

INCREMENTA L ANALYSIS

Bright Views is a window manufacturer. It produces high-quality windows in a variety of sizes, shapes, and colors. One of the leaders in its industry, Bright Views offers a lifetime warranty on its products. Recently, however, it has started to face increased competition for lower-end windows for the replacement business. Consumers, faced with having to replace all of their windows when problems occur, often choose a lower-quality window to save money on the job. While Bright Views does very well in the new building segment, which is 40% of the industry, it is losing share in the replacement window segment. This is a very negative situation for Bright Views because a downturn in the economy has new housing down while replacement window demand has been increasing.
The statistics for Bright Views’ sales over the last three years are in the table below.

The current average price of Bright Views per window is $500. Current manufacturing costs are 60% of the price. The average price in the marketplace for new windows ranges between $590 and $440. The replacement window market is much less expensive, with average price per window sitting at approximately $295 per window. Since Bright Views currently only offers one line of windows, its premium collection, its price in the replacement market is 69% above the average price for replacement windows offered by other fi rms. The toehold Bright Views has in the replacement market is it is known for high quality and a lifetime warranty. When faced with the higher price, however, customers often opt for less quality and a less robust warranty as they do not see themselves in the same home for more than five years.
Dan Swaim, the vice president of marketing, has pulled together a team of people to see if they can develop a lower-end product that will help the company gain share in the replacement window market. They do not w ant to lower the price on their premium window s as that might signal a reduction in quality. The following is the discussion that takes place at a team meeting.

Dan: Thank you all for being here. We have a tough job ahead of us. We need to design a new line of windows for Bright Views that continues to keep our reputation for quality in place but enables us to drop our prices by 25% to $375 per window. We don’t need to compete with the lowest-priced windows, but we do need to get our prices down if we aren’t going to be squeezed out of the replacement window business. That means we have to get costs down to $225 or less if we are to continue to hit our profit goals.

Pete Wilson, Manufacturing: With our existing workforce and plant, I simply don’t see how we can make these goals. We’d need to start from scratch. That would mean $8,500,000 depreciation per year for a new factory, $20,000,000 in annual depreciation for new machines, and then we could hire workers for $15 per hour rather than the current $25 per hour. The new machines would also use less labor than our labor-intensive lines now, so we could make 10,000 windows per line worker vs. the current 5,000 windows per line worker. That means our labor costs would drop by 50% from the current 30% of total costs for the new windows. Overhead would increase, though, from 20% of cost to 35%. Big expense up front, though, one we can’t avoid. And remember, we need to consider materials, which are normally 50% of the window.

Dan: Great information, Pete, but I need to see all of these numbers put together to make any sense of your details. If we can make these new windows well enough, we should be able to increase our market share in replacement windows by 50% in the first year. But we have to have quality or it could cause problems with our other sales.

Fran Daley, Personnel: I see it as more difficult to open up the new plant with new labor than Pete apparently does. I have another concern, too. What if someone decides to use the low – er-quality replacement window for a new house? Couldn’t that hurt the company’s reputation?

Dan: I have to hope we could manage with Pete’s recommendations, Fran. But the reputation issue is one that keeps popping up. The only other option I see is to lower our prices by 10% across the board. That will up our new housing market share by 10% and increase our replacement market share by 15%, but our costs won’t change so we’re directly hitting profit here.

Wendy Silvers, Finance: Dan, why don’t I take all of these assumptions and put together an analysis of the differences if we do nothing, open a new plant, or simply lower prices? That should help us wade through the financial details so we can then focus attention on things like reputation effects and other qualitative concerns, like the impact on our workforce.

Dan: Sounds good, Wendy. T hanks. And would you do me a favor and add one more assumption to the new plant option? Let’s assume that Fran has a point about the impact on new unit sales if we offer lower-priced windows. For now, assume we’ll lose 10% of existing market sales of our premium line if we begin to offer lower-end products. Let’s break for now and meet again in a week. In the meantime, put your thinking caps on to both look for other options and think through the qualitative concerns we need to keep in mind.

REQUIRED:

a. Using the information contained in the discussion, do an analysis of the “as is” situation, the differences that will occur if you open a new plant, and finally the impact of lowering prices. Be careful to include both new construction and replacement windows in all of your calculations as both markets are affected.

b. What should Bright Views do? Why?

c. What are the qualitative concerns you would voice to Bright Views’ management team?