MOG 1001 Profitability Report Cottage Living Case Study


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MOG1001 – Case Study [F21]
Case Study – Cottage Living
The Situation:
James White, an entrepreneur from Bracebridge,
Ontario owns a company called Cottage Living that
manufactures outdoor lounge chairs commonly
referred to as ‘Muskoka chairs’. These chairs are made
from a very high quality composite wood and are
considered a premium product in the outdoor
furniture market.
Cottage Living ships 70% of their manufactured chairs
to various outdoor furniture retailers across Canada
and the northern parts of the United States. They also operate a seasonal ‘flagship’ store in Bracebridge where
they sell 30% of their manufactured chairs during the summer.
In 2021, the retail price in their store has been set at $430 CAD. Cottage Living has agreements with all of the
other outdoor furniture retailers that they supply chairs to where they must match the Bracebridge retail store
price. In exchange, Cottage Living supplies chairs to these retailers at $150 below the current retail price.
Over the past two years there has been substantial growth in the demand for premium outdoor living products.
There has also been a steady increase in the number of suppliers of premium ‘Muskoka Chairs’ throughout
Ontario and North America who sell products that are very similar. The industry could best be described as
‘monopolistic’ where as there is slight product differentiation, many buyers and sellers, and no one company
has much control or power in the overall market.
In an attempt to increase overall profitability, Mr. White is considering expanding the manufacturing capacity of
Cottage Living. To make sure that he would be able to sell the additional units at the market price he is also
considering changing the way that he compensates his sales team.
Your Task:
Mr. White previously hired a group of consultants who had started collecting and analyzing some data.
However, due to a personal disagreement he has decided to go in another direction. Based on your reputation
as an expert in managerial economics, he has hired you and your team to take over the project.
The previous data is available to you but you need to finish the analysis and determine a business strategy that
can increase Cottage Living’s profitability while also managing risk. He would like you to present your findings
and recommendations in a brief report.
The report needs to include the following deliverables:
1. A market analysis and prediction for the overall market price of premium composite Muskoka
2. A net present value analysis of the proposed manufacturing expansion and a final
recommendation on expansion
3. A proposal for a new compensation plan for his sales team
Market Supply and Demand:
For 2021, Cottage Living is expecting final sales to be 50,000 units (100% of the units manufactured). The
previous consultants had collected and studied market data for Cottage Living’s sales region and approximated
the total market demand and supply schedules for high quality composite Muskoka chairs in 2021:
Mr. White feels this analysis is reasonable given that all competitors also have a selling price very close to $430
and since the average variable production costs for Cottage Living chairs is $200 per chair in the current
Bracebridge facility it would make sense that market supply would be very low at a retail price of $280.
The previous consultants determined that for the next 3 years (2022, 2023, and 2024). There were 3 equally
likely scenarios for the market supply and demand:
Worst Case: The increased demand for ‘outdoor living’ products in 2019 and 2020 could have been
largely due to the unique conditions created by the pandemic. If this is the case they expect that the
2022 demand for composite Muskoka chairs will fall by 600,000 units at every price level and remain at
those levels until 2024.
Moderate Case: The increased demand for ‘outdoor living’ products in 2019 and 2020 could have been
part of a longer term trend for consumers and was possibly not affected by the pandemic. If this is the
case they expect that 2022 demand will stay roughly at 2021 levels until 2024.
Best Case: The increased demand for ‘outdoor living’ products in 2019 and 2020 could have been part of
a longer term trend for consumers and may have been negatively affected by the pandemic. If this is the
case they expect that demand will increase by 500,000 units at every price level and remain at those
levels until 2024. In this scenario it would be likely that supply was also negatively affected by the
pandemic and therefore market supply would also quickly increase in 2022 by 200,000 units at every
price level and remain at these levels until 2024.
Given the competitive nature of the industry Cottage Living has very limited price control and they will set their
prices at the market rate for 2022-24. Mr. White needs you to determine the market price for premium,
composite Muskoka Chairs for 2022-24.
Capital Investments Production Process and Costs:
Mr. White is considering temporarily increasing his manufacturing capacity to a maximum of an additional
50,000 units in 2022 by opening a small secondary facility in Bracebridge. The expected life of this temporary
new facility would be 3 years (2022-24) with no expected salvage value of the facility or the equipment. For the
expansion Cottage Living would need to invest $8,000,000 by the end of 2021.
Given Cottage Living will not be selling chairs above market price he believes he should be able to sell all of the
additional units (as long as he can motivate his sales team) at the same mix of 70% to other retailers and 30% in
their Bracebridge store.
The previous consultants had provided this unfinished chart below for 5 different output options that needs to
be completed:
Variable Cost Variable Cost
Selling Price /
Total Revenue
Total Profit
Variable Cost /
Cottage Living would be financing the investment through a bank loan. The current cost to borrow for Cottage
Living is 6%. Mr. White needs you to find which of the 5 output options maximizes profit at the new facility and
then determine if the net present value of this investment is worth proceeding with the expansion.
Sales Team Compensation:
If Mr. White proceeds with the manufacturing expansion he feels he will need to alter the current compensation
package for his sales team in order to make sure Cottage Living can sell the additional units at market price. In
an attempt to retain talented salespeople he has previously offered a very competitive yearly salary of $70,000
plus benefits and 4 weeks paid vacation. This pay structure has worked well in the past to attract loyal
employees and to create a positive work environment at Cottage Living. There are currently 5 permanent
However, given how strong demand in 2019 and 2020 for Cottage Living products has been Mr. White feels that
his sales team has been lacking motivation. They have also been taking their vacations during high demand
months from May-August (he is not interested in dictating when people take their vacation). He is worried that if
there is an increase in Cottage Living’s inventory, the poor sales habits that his team has picked up during the
pandemic may negatively affect future sales.
He would like you to create a new compensation package plan that he can then present to his employees. He is
willing to compensate his employees slightly more on average but he would like to make sure it provides
motivation for them to each increase their average sales volume to ensure he is able to sell all of the additional
He will need his employees to voluntarily agree to this so he would like you to help present the information to
them in a way that shows different scenarios and how the new package can benefit them for their hard work,
while not disrupting the positive culture that currently exists at Cottage Living.
The Report
Since Mr. White needs to make a decision quickly on the proposed expansion he needs you to submit your
report by:
Friday, November 26th at 11:59 pm
He would like you to give a detailed explanation of your quantitative analysis for each of the three deliverables
and hopes that you will consider any risk factors in your recommendations. He is also interested if there are any
additional qualitative factors he should consider for each decision and would be pleased if you included them in
your report.
If you have any questions about the report you can contact Cottage Livings VP of Operations at:
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Case Study Information:
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Cottage Living Case Study – Rubric
Market Analysis
Expansion Analysis
Compensation Analysis

Market equilibrium found for all 3 scenarios
Correct overall market price determined for 2022-24,
calculations/analysis provided

Correct cost chart (MC, TC, AC, TR)
Correct optimal output
Net present value analysis
Justified recommendation on expansion

Clear and rationale compensation package
Details on average expected compensation per salesperson
Qualitative factors considered for cultural fit
Retail vs Wholesale margins considered

Rationale provided.
Both financial and qualitative factors discussed
Risk analysis performed
Clearly explained and appropriate recommendations based
on analysis

Professional (point-form ok)
Organized, clear, concise, labelled, explained
Proper grammar and spelling
Qualitative Analysis and overall Strategic
Quality of Analysis and Written Report

Purchase answer to see full

Explanation & Answer:
Case Study

Cottage Living

James White


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