Homestead Corporation Sells a Line of Power Tools to Home

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 relies 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.