Question

DuPont Model: Comfy Chair Case

You work for an office supply company and your boss has a problem.

The new product development (NPD) team has designed a new office chair – The Comfy Chair. The NPD team wants to use a new material – Synthetic X – for the seat and arm covers. Right now, all of your office chairs use a nylon-based material. Synthetic X is an innovative product with very few suppliers, but has the potential to capture customers’ attention and drive additional sales.

Your boss is convinced that Synthetic X – which is 30% more expensive than the nylon-based material – is too expensive and will kill your company’s ROI. But the NPD team is arguing that additional sales will cover the extra cost of using Synthetic X.

The Marketing team is projecting sales for The Comfy Chair at 15,000 if the company sticks with its nylon-based material. If the company uses Synthetic X, the Marketing team projects sales of The Comfy Chair could reach 17,500. The Comfy Chair is priced at $275.

Your boss has a meeting with the Chief Operating Officer this afternoon and is getting ready. He has come up with following numbers:

Comfy Chair per unit costs

• Direct labor = $20
• Direct manufacturing overhead = $25
• Nylon-based seat and arm covers per unit = $30
• Other materials per unit excluding seat and arm covers = $55
• Other costs per unit associated with production = $100
• Currently, inventory costs are calculated as $30/unit for covering and $55/unit for other materials

Additional Information

• Relevant accounts receivable and cash = $850,000
• Relevant plant, property, and equipment = $8,000,000

Use the DuPont Model to compare the cost/sales numbers for The Comfy Chair using the nylon-based material versus the cost/sales numbers using Synthetic X.

1. What specific numbers would you give your boss as he goes into his meeting with the COO? Why?

2. What additional information might you like to know about this situation? Why?

3. What could your boss have done differently to avoid the kind of confrontation that is now underway between him and the NPD team?

Answer 1