Masterton Carpet

3 Pages 796 Words

Problem Statement:
Given recent developments within the floor covering industry, Masterton Carpet Mills, Inc., which is a privately held manufacturer of medium to high priced carpet, is considering the possibility to establishing their own distribution centers or wholesale operations focusing on residential business in an effort to maximize profits.

Option #1: Do Nothing (i.e. don’t change anything)
Currently, Masterton Carpet Mills, Inc. is lagging behind in sales growth, but is continuing to remain profitable. They are a small manufacturer in a large, highly competitive industry. The first option they have is to do nothing and continue to use their current wholesale distribution method currently being utilized. According the information that was given in this case, the following criteria have been evaluated to achieve the total estimated wholesale distribution cost of approximately $15.4M; wholesaler margins, cost of servicing wholesalers, and the accounts receiving carrying costs. Through a 20% wholesale markup, there is currently $10.8M spent at the wholesale level. The margin of $10.8M paid out to wholesalers could be retained by Masterton Carpet Mills, Inc. to fund the change in the distribution channel using internal capital. This would satisfy conditions set forth by Robert Meadows, President of Masterton Carpet Mills, Inc. and company policy to finance programs from internal funds. The cost of servicing the current wholesalers is approximately $3.2M, which is 6% of sales ($54M * 6% = $3.240M) Given that it typically takes 90 days from Masterton Carpet Mills, Inc. to collect its retail account receivable and that accounts receivable carrying costs are 10% of sales, the total cost is $1,350,000. If Masterton Carpet Mills, Inc. continues the use of wholesalers, approximately $15.4M will continue to be spent in that segment of the distribution channel.

Option #2: Establish its own distribution centers or wholes...