BASIC MARKETING 18th Edition by Jerome McCarthy William Perreault, Joseph Cannon

Exercise 61

Excel Molding, Inc.
Jill Krombach is trying to decide whether to leave her present job to buy into another business and be part of top management.
Jill is now a sales rep for a plastics components manufacturer. She calls mostly on large industrial accounts-such as refrigerator manufacturers-who might need large quantities of custom-made products like door liners. She is on a straight salary of $55,000 per year, plus expenses and a company car. She expects some salary increases but doesn't see much longrun opportunity with this company.
As a result, she is seriously considering changing jobs and investing $60,000 in Excel Molding, Inc., an established Chicago (Illinois) thermoplastic molder (manufacturer). Gary Beal, the present owner, is nearing retirement and has not trained anyone to take over the business. He has agreed to sell the business to Joseph O'Sullivan, a lawyer, who has invited Jill to invest and become the sales manager. Joseph has agreed to match Jill's current salary plus expenses, plus a bonus of 2 percent of profits. However, she must invest to become part of the new company. She will get a 5 percent interest in the business for the necessary $60,000 investment- all of her savings.
Excel Molding, Inc., is well established and last year had sales of $3.2 million but zero profits (after paying Gary a salary of $90,000). In terms of sales, cost of materials was 46 percent; direct labor, 13 percent; indirect factory labor, 15 percent; factory overhead, 13 percent; and sales overhead and general expenses, 13 percent. The company has not been making any profit for several years-but it has been continually adding new computer-controlled machines to replace those made obsolete by technological developments. The machinery is well maintained and modern, but most of it is similar to that used by its many competitors. Most of the machines in the industry are standard. Special products are made by using specially made dies with these machines.
Sales have been split about two-thirds custom-molded products (that is, made to the specification of other producers or merchandising concerns) and the balance proprietary items (such as housewares and game items, like poker chips). The housewares are copies of items developed by others and indicate neither originality nor style. Gary is in charge of selling the proprietary items, which are distributed through any available wholesale channels. The custom-molded products are sold through two full-time sales reps-who receive a 10 percent commission on individual orders up to $30,000 and then 3 percent above that level-and also by three manufacturers' reps who get the same commissions.
The company seems to be in fairly good financial condition, at least as far as book value is concerned. The $60,000 investment will buy almost $88,000 in assets-and ongoing operations should pay off the seven-year note (see Table 1). Joseph thinks that with new management the company has a good chance to make big profits. He expects to make some economies in the production process-because he feels most production operations can be improved. He plans to keep custom-molding sales at approximately the present $2 million level. His new strategy will try to increase the proprietary sales volume from $1.2 million to $3 million a year. Jill is expected to be a big help here because of her sales experience. This will bring the firm up to about capacity level-but it will mean adding additional employees and costs. The major advantage of expanding sales will be spreading overhead.
Table 1 Excel Molding, Inc., Statement of Financial Conditions, December 31, 2010

Some of the products proposed by Joseph for expanding proprietary sales are listed below.
New products for consideration:
Safety helmets for cyclists.
Water bottles for cyclists and in-line skaters.
Waterproof cases for digital cameras.
Toolboxes.
Closet organizer/storage boxes for toys.
Short legs for furniture.
Step-on garbage cans without liners.
Exterior house shutters and siding.
Importing and distributing foreign housewares.
Excel Molding faces heavy competition from many other similar companies including firms that have outsourced production to China and Eastern Europe, where labor costs are much lower. Further, most retailers expect a wide margin, sometimes 50 to 60 percent of the retail selling price. Even so, manufacturing costs are low enough so that Excel Molding can spend some money for promotion while still keeping the price competitive. Apparently, many customers are willing to pay for novel new products-if they see them in stores. And Jill isn't worried too much by tough competition. She sees plenty of that in her present job. And she does like the idea of being an "owner and sales manager."
Evaluate Excel Molding's situation and Joseph O'Sullivan's strategy. What should Jill Krombach do? Why?