In January, Donald Hoover, field manager of Springfield Builders, was deciding whether to employ full time painters or to subcontract for painting services on a daily basis from a local painting company. Inasmuch as Springfield was experiencing some financial difficulties due to a recent decline in housing starts, Mr. Hoover knew that this decision could have some important consequences for the company’s financial viability.
BACKGROUND
Springfield Builders was a large construction company specializing in residential housing. Begun about 20 years ago, Springfield had enjoyed remarkable growth. Its revenues had increased tenfold during the last ten years, and its workforce had quadrupled. With the growth in activity, Springfield had outpaced its management capabilities. Last year, the company had lost money on several projects due in large part to a lack of good controls on costs, and some poor decisions with the use and management of subcontractors.
It was because of these financial difficulties that Mr. Hoover had been hired. He began work shortly after receiving his MBA from a local university. While an undergraduate student, he had worked during the summers in a variety of capacities for a general contractor. He thus was quite familiar with the construction side of the business. This familiarity, coupled with his MBA skills, was just what the company needed to get its financial house in order. Mr. Hoover had been hired with the explicit mandate to put the company on a sound financial footing.
Springfield was organized into several divisions, one of which was the painting division. The painting division both painted the houses that the company built and did contract painting for some smaller construction companies. The division was expected to make a sizable contribution to the company’s overhead costs. During the past two years, however, the division’s contribution had fallen considerably, and had actually been negative during the most recent quarter.
REVENUE AND EXPENSES
The fixed costs associated with Springfield’s painting division were estimated to be $900 a month for rent and other expenses. The variable costs of painting supplies (measured on a per-painter-per-day basis) were expected to be $80. Mr. Hoover believed that the program could earn revenue of $200 per day per painter.
In terms of personnel, Mr. Hoover saw two options. The first was to hire full time painters to meet expected demand each month. Each person would work a maximum of twenty days per month. His or her monthly salary would be $1500, regardless of the number of days actually worked during the month. . . .
Assignment
- Calculate the breakeven point for each option. Why do these breakeven volumes differ?
- Which option is preferable? Why?
- Assuming the quarterly data represent the pattern for the upcoming year, how should Mr. Hoover staff the division so as to maximize profits?
- What other factors or options should Mr. Hoover consider?
- What should Mr. Hoover do?