Forner Carpet Case

Forner Carpet Case - Forner Carpet (with permission from...

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Forner Carpet (with permission from Professor James Reece, from , 9 th ed.) Forner Carpet Company produced high-grade carpeting materials for use in automobiles and recreational vans. Forner’s products were sold to finishers, who cut and bound the material so that it would fit perfectly in the passenger compartment or cargo area (e.g. automobile trunk) of a specific model vehicle. These finishers also made carpet floor mats. Some of these finishers were captive operations of major automobile assembly divisions, particularly those that assembled the “top of the line” cars that included high-grade carpeting; other finishers concentrated on the replacement and van customizing markets. Late in 1993, the marketing manager and the chief accountant of Forner met to decide on the list for carpet number L-42. It was industry practice to announce prices just prior to the January – June and July – December “seasons”. Over the years, companies in the industry had adhered to their announced prices throughout the six-month season unless significant unexpected changes in costs occurred. Forner was the largest company in its segment of the automobile carpet industry; its 1993 sales had been over $40 million. Forner’s salespersons were on a salary basis, and each one sold the entire product line. Most of Forner’s competitors were smaller than Forner; accordingly, they usually awaited Forner’s price announcement before setting their own selling prices. Carpet L-42 had an especially dense nap; as a result, making it required a special machine, and it was produced in a department whose equipment could not be used to produce Forner’s other carpets. Effective January 1, 1993 Forner had raised its price on this carpet from $3.95 to $4.75 per square yard. This had been done in order to bring L-42’s margin up to that of the other carpets in the line. Although Forner was financially sound, it expected a large funds need in the next few years for equipment replacement and possible diversification. The 1993 price increase was one of several decisions made in order to provide funds for these plans. Forner’s competitors, however, had held their 1993 prices at $3.95 on carpets competitive with L-42. As shown in Exhibit 1, which includes estimates of industry volume on these carpets, Forner’s price increase had apparently resulted in a loss of market share. Exhibit 1: Carpet L-42 Prices and Production 1991 - 1993 Selling Production Volume (Sq. Yds) Price per Sq. Yd. Season* Industry Forner Competitors Forner 1991-1 549,000 192,000 $4.75 $4.75 1991-2 517,500 181,000 $4.75 $4.75 1992-1 387,000 135,500 $3.95 $3.95 1992-2 427,500 149,500 $3.95 $3.95 1993-1 450,000 135,000 $3.95 $4.75 1993-2 562,500 112,500 $3.95 $4.75 * 199X-1 means the first 6 months of 199x; 199x-2 means second 6 months
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This note was uploaded on 11/08/2011 for the course MA 827 taught by Professor Wain during the Summer '11 term at BC.

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Forner Carpet Case - Forner Carpet (with permission from...

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