Question

Founded in 1983, Beverly Hills Fan Company is located in Woodland Hills, California. With 23 employees and sales of less than $10 million, the company is relatively small. Management feels that there is potential for growth in the upscale market for ceiling fans and lighting. They are particularly optimistic about growth in Mexican and Canadian markets. Presented below is information from the president’s letter in the company’s annual report. “An aggressive product development program was initiated during the past year resulting in new ceiling fan models planned for introduction this year. Award winning industrial designer Ron Rezek created several new fan models for the Beverly Hills Fan and L.A. Fan lines, including a new Showroom Collection, designed specifically for the architectural and designer markets. Each of these models has received critical acclaim, and order commitments for this year have been outstanding. Additionally, our Custom Color and special fans continued to enjoy increasing popularity and sales gains as more and more customers desire fans that match their specific interior decors. Currently, Beverly Hills Fan Company offers a product line of over 100 models of contemporary, traditional, and transitional ceiling fans.” Instructions: What points did the company management need to consider before deciding to offer the special-order fans customers? How would incremental analysis be employed to assist in this decision?

Answer 1

Management may look into the following points before deciding about special offers

• Does the company have enough spare capacity to honor special order on time
• Will it increase the overall fixed cost
• What price would be suitable for the company to offer
• What should be the minimum order size to accept the offer
• Does the company have desired ability to manufacture quality product as customized by customer?

Incremental anaylsis is the systematic study of cost and benifits associated with the decision which needs to be taken out before accepting a proposition. Incremental analysis can help in identifying costs involved in the project along with revenues and determine whether management should proceed for the offer. However, incremental anaylsis can only look for quantitative data and it does not take in to account qalitative factors like required ability to produce the offer as required by customer.