Question 4: Business Decision
Alder & Pine Furniture: build or outsource
- Units 1 and 4
- 8 points
- About 40 minutes
You can use a calculator on this question, just like on exam day.
A long case about a business choosing between two options, with financial and nonfinancial details: you describe a factor affecting the business, compare the options using financial and nonfinancial criteria, and recommend one, backed by three criteria and evidence from the case. On the exam: Question 4 of 4, Section IIB (Questions 2–4 share 65 minutes); about 40 minutes including a 15-minute reading period, 15% of the score. Assesses Skill Category 3. Section II has 4 free-response questions in 90 minutes (40% of the score). The exam is fully digital in Bluebook, and only a 4-function calculator is allowed (handheld or the built-in Desmos 4-function calculator).
The question and its sources
You have been hired as a consultant to help the business described below choose between two courses of action. Read the whole scenario before you start writing. Respond to parts A, B, and C.
Background
Alder & Pine Furniture builds solid-wood dining tables by hand in Asheford, a small town. Ruth Calder founded the company in 1998 and still runs it. It has 40 employees, 28 of them skilled craftspeople whom the company trained itself over several years.
Alder & Pine's vision statement reads: 'Furniture that lasts for generations, made by hand by local craftspeople.' It sells through its own showroom and website, offers a lifetime warranty, and charges $2,400 to $4,000 a table.
After a national home-design magazine featured the tables two years ago, orders rose 30%. The workshop is now at full capacity. Customers wait 14 weeks for a table, and 12% of last year's orders were cancelled, most often because of the wait.
Hardwood lumber prices rose 18% this year. In a recent customer survey, 58% of buyers said 'handmade by local craftspeople' was a main reason they chose Alder & Pine.
Calder has narrowed her choices to two courses of action.
Source: Hypothetical scenario written for this practice question
Option 1: Second Workshop
Alder & Pine would lease and equip a second workshop three miles from the first and hire 15 new craftspeople. Training them takes about six months. Once they're trained, the company could build 40% more tables, all still made by hand in Asheford.
Source: Hypothetical scenario written for this practice question
Option 2: Contract Manufacturer
Alder & Pine would hire a contract manufacturer 600 miles away to build its Everyday table, its simplest and best-selling design, using computer-controlled cutting machines and an assembly line. Alder & Pine's own craftspeople would build only its custom tables. Production of Everyday tables could begin in three months and raise the company's total output by 80%.
The manufacturer also builds furniture for several other brands. For a fee included in the costs below, it would agree not to make similar tables for Alder & Pine's rivals. Alder & Pine would hire inspectors to check quality. Several of its craftspeople have told Calder they worry that machine-made tables would hurt the brand.
Source: Hypothetical scenario written for this practice question
Table 1. Projected financial effects of each option
| Item | Option 1: Second Workshop | Option 2: Contract Manufacturer |
|---|---|---|
| One-time cost | $600,000 | $200,000 |
| Added annual revenue | $1,200,000 | $1,500,000 |
| Added annual costs | $1,050,000 | $1,430,000 |
| Added annual profit | $150,000 | $70,000 |
| Outside funding needed (Alder & Pine has $250,000 in cash for this project) | $350,000 | $0 |
| Months until added production begins | 6 | 3 |
Source: Hypothetical data written for this practice question
Suggested time: 40 minutes
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Part (A(i))
1 pointBusinesses are shaped by internal factors, market factors and external factors. Describe one internal, market or external factor in the scenario that affects Alder & Pine.
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Part (A(ii))
1 pointExplain how the factor you described in part A(i) creates an opportunity or a problem for Alder & Pine.
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Part (B(i))
1 pointCompare the two courses of action using projected annual return on investment (ROI) as the criterion. Describe a difference or similarity between them, and include specific evidence related to each course of action.
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Part (B(ii))
1 pointCompare the two courses of action using one other financial criterion. Describe a difference or similarity between them, and include specific evidence related to each course of action.
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Part (B(iii))
1 pointCompare the two courses of action using one nonfinancial criterion. Describe a difference or similarity between them, and include specific evidence related to each course of action.
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Part (C)
3 pointsRecommend a course of action for Alder & Pine. In your response, do the following: recommend one of the two courses of action in the scenario; explain why you recommend it; and support your recommendation with any three specific criteria, financial or nonfinancial (they may include the criteria from part B), with evidence from the scenario for each criterion.
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