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Option #1: Analysis of Payton Furniture
Corp

Payton Furniture Corp. is nationally recognized for making
high-quality products. Management is concerned that the company is not fully
exploiting its brand power. Payton’s production managers are also concerned
because their plants are not operating at near full capacity. Management is
currently considering a proposal to offer a new line of affordable furniture.

Those in favor of the proposal (including the vice president
of production) believe that, by offering these new products, the company could
attract a clientele that it is not currently servicing. It could also operate
its plants at full capacity, thus taking better advantage of its assets.

The vice president of marketing, however, believes that the
lower-priced (and lower-margin) product would have a negative impact on the
sales of existing products. The vice president believes that $10,000,000 of the
sales of the new product will be from customers that would have purchased the
more expensive product but switched to the lower-margin product because it was
available. (This is often referred to as cannibalization of existing sales.)
Top management feels, however, that even with cannibalization, the company’s
sales will increase and the company will be better off.

The following data are available:

(In Thousands)

Current Results

Proposed Results
without Cannibalization

Proposed Results
with Cannibalization

Sales Revenue

$45,000

$60,000

$50,000

Net Income

$12,000

$13,000

$12,000

Average total
assets

$100,000

$100,000

$100,000

Instructions:

Compute
Payton’s return on assets, profit margin, and asset turnover, both with
and without the new product line.


Discuss
the implications that your findings in part (A) have on Payton’s decision.

Are
there any other options that Payton should consider? What impact would
each of these have on the above ratios?

Show your work and
use MS Excel or Word for your submission
. The written portion of your assignment should be 4-6 pages in length
with document and citation formatting conformity with the APA
Requirements.

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