Introduction: Blaze Manufacturing
The case study that is written by Causseaux and Caster (2016) observes Blaze Manufacturing (BM), a small textile manufacturer in New York. For more than 20 years, the company had been operated as a job shop where products, mainly curtains and bedspreads, are made in small customized batches. The main stakeholders are Joe, the president of the company, and Bill, the company’s lead salesman. Wendy, a certified accountant for a company called Omega, was filling the position of a controller in BM temporarily after the former controller, Mike, retired. Omega was owned by George, who was also a major shareholder in BM.
The industry was rough, with various external situations in favor of foreign competitors which allowed them to have a very competitive price. When a large order came to BM, Joe and Bill could not reject it. Wendy was ordered to analyze the offering price and the overall profitability of the order. She found out that the price was too low and it will result in a significant loss. However, Joe and Bill could not afford to lose the order and rejected Wendy’s analyses. As a result, the order was accepted and in a year, the company went bankrupt and liquidated.
This paper will examine the case study from ethical and financial perspective. It will identify the main problem and diagnose the causes. It will also evaluate the proposed solution and other possible alternatives, followed by a recommendation on the plan of action. As a further insight, the paper will also state the importance and relevance of the case study to the overall business studies.
The main problem in the case study is Joe and Bill’s persistence to accept the order even when the analysis shows that it will hurt the company. Both are complacent in making a decision and too focused on gaining the big cash that the order will provide, especially Joe as the president of the company. If he wanted to reject Wendy’s analysis, he should have proposed another strong analysis and possible action that can make the order profitable instead of only refusing Wendy’s analysis by only talking about the big scale of the order. In this case, Joe and Bill were negligent.
Another issue that can be pointed out is the fact that Wendy and Omega were unable to convince Joe and Bill that the big order will result in a significant loss. Wendy should insist that with a negative gross margin or contribution margin per unit, the bigger the order, the bigger the loss. Even without evidence, Joe’s feeling that the big order will allow better economies of scale can be a good hypothesis. Wendy should also analyze the opportunities and actions that can make the economies of scale achievable. Wendy should be able to explain that there is no chance of profit from this order even after several actions to improve economies of scale were taken.
Diagnosing the Causes of the Problem
The main causes of the problem are rooted in several internal and external issues. In the internal issue, the ethical and financial management expertise was questionable. Joe and Bill were too hasty to reject Wendy’s analysis and blinded by the temptation of the big order. This attitude may also be a result of how Blaze Manufacturing struggled to operate on a very slim margin for an extended period of time. Joe and Bill were too afraid of not getting any orders and ultimately lose the competition. A weak ethical corporate culture was also implied in the case study. Joe and Bill were unable to maintain their professional expertise as well as acknowledge Wendy’s expertise and credibility.
Wendy’s approach was correct. She used job costing analysis to evaluate the profitability of the order. A job costing system records revenues and costs for each job for a company that has specialized products and has different material and labor requirements (Heisinger & Hoyle, 2012). However, Wendy’s inability to communicate and convince the credibility of her analysis can also be attributable to her lack of experience, which can be another cause of the problem.
From the external perspective, the problem is aggravated by the circumstances in the industry. Foreign textile companies were able to provide low prices since they did not have to follow US legal and environmental requirements as well as having a low labor costs. Some other local textile companies have been out of business and there is no government protection or stimulus that can help the local textile companies. These circumstances lead to Joe and Bill’s reluctance to accept the fact that even if the order was tempting, it will further hurt the company’s cash flow, instead of helping it.
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Evaluating the Proposed Solution and Other Possible Alternatives
The proposed solution focuses on two aspects: financial and ethical. From a financial aspect, the proposed solution was to change the analysis to contribution margin instead of gross margin. The pros of this view are that it may help Wendy in communicating that the order will not be profitable. However, the cons are still not solved. If Joe and Bill were very determined to accept the order, whatever Wendy says would not get into their acceptance. The second aspect was ethical based on the Institute of Management Accountants (IMA) standard. The fundamental ethical principles of IMA are honesty, fairness, objectivity, and accountability (IMA, n.d.). If Joe and Bill could follow these principles, then they would not easily reject Wendy’s recommendation and instead, they would collaborate, using their expertise to find a better and more profitable solution.
There are several other possible alternatives that can be taken by the stakeholders as follow.
- Joe, Bill, and Wendy should understand the perks of the industry. They should collaborate together to answer the main question: if a $77 price would not be profitable, how much the price can be increased without endangering the prospect of going out to the competitor? This is an analysis that is not strictly financial but also requires a deep understanding of the circumstances in the industry.
- Joe, Bill, and Wendy should also collaborate together to seek the opportunity of improving efficiency considering the large order. Instead of focusing on the debate over accepting or refusing the recommendation, it will be more productive if there are other analyses that examine the possible action that can improve efficiency and profitability.
- Aside from the contribution margin analysis, Wendy can show the ultimate loss that the company would suffer if the order is accepted on the current basis by multiplying the per-unit analysis with the actual number of units in the order.
- For a long-term solution, the company should try to convince the government or congress to fix the unhealthy circumstances of the industry and provide more protection to the local companies, since they were struggling against foreign company’s price wars.
Recommendation on the Plan of Action
For the plan of action, firstly, Wendy should try to follow the proposed solution from the case study. She can switch to contribution margin analysis and convince Joe and Bill using an ethical perspective based on IMA standards. However, she should not stop there. She should acknowledge that Blaze Manufacturing was struggling and Joe was too afraid of losing customers. She should provide further analysis of how much the price should be increased and whether it will risk the customers leaving the company. By acknowledging their perspective, Wendy can look for a way to help them find an appealing solution that will not harm the company.
Instead of sticking to the recommendation that the price is too low, Wendy should encourage Joe and Bill to discover possible actions that can improve efficiency and economies of scale. She should also get how each action may reduce the costs in her job costing analysis. Further, she should provide a sensitivity analysis that shows how much the company can afford the change in cost so it would not become a loss. With this detailed analysis, Joe and Bill would see if the company has the ability to turn the order to become profitable or if it would be very difficult. Thus, they would understand Wendy’s recommendation.
If Joe, Bill, and Wendy found a way to make the order profitable and the client continued the order then the company would get a significant boost in profit. The company can use part of it to send aspirations to congress or the government to fix the unhealthy circumstances of the industry and provide more protection to the local companies. The situation can not be left unchecked.
The Importance, Relevance, and Limitation of the Blaze Manufacturing Case Study
Financial analysis is one of the most important languages of business since it offers insights into the company’s overall performance (Collins, 2012). It is always relevant in overall business studies. The Blaze Manufacturing case study shows how a profitability analysis can determine the rise and fall of a company. It also pointed out the ethical principles of the IMA standard that should be followed to ensure that competence, credibility, and integrity are valued and held fast.
The limitation of the case study is that it is too focused on Joe and Bill’s reluctance to acknowledge Wendy’s credibility. The provided information can be further elaborated to include the financial statements of the company or the company’s financial ratio to show how the actual financial situation of the company. It will allow a deeper analysis of Joe and Bill’s perspectives and add richness to Wendy’s analysis.
References Collins, K. (2012). An introduction to business v.2. Lardbucket. https://2012books.lardbucket.org/books/an-introduction-to-business-v2.0/ Licensed under Creative Commons by-nc-sa 3.0 Causseaux, W., & Caster, B. (2016). Blaze manufacturing: An ethical analysis. Journal of Business Case Studies, 12(1), 13-18. https://drive.google.com/file/d/15n8GL3Y29pIBkPwXNyX1NqCZYpma1MKY/view?usp=share_link IMA. (n.d.). IMA Statement of Ethical Professional Practice. https://www.imanet.org/Career-Resources/Ethics-Center/Statement Heisinger, K., & Hoyle, J. B.(2012). Chapter -13 How do managers use financial and nonfinancial performance measures. In Managerial Accounting, 1030 –1129 . Saylor Foundation. https://open.umn.edu/opentextbooks/textbooks/137 licensed under Creative Commons by-nc-sa 3.0.