Return on investment, residual income, economic value

While many people recognize Sonora, Mexico as a beautiful vacation spot, it is also a large furniture manufacturing location in North America. Guillermo Navallez has made furniture for years near his Sonoran home. The area had a good supply of timber for the variety of tables and chairs produced by his company. Labor was also relatively inexpensive. In addition, he priced his handcrafted products at a slight premium for the quality they represented. Overall, life was good for Guillermo.

Unfortunately for Guillermo, in the 1990s two events combined causing a large dent in his business. First, a new competitor from overseas entered the furniture market. Using a high-tech approach, this foreign competition provided furniture to exact specifications and did so with rock-bottom prices. Second, the sleepy communities in Sonora woke up as one of the largest retailers in the nation's headquarters emerged nearby, and its influence had expanded considerably. With inexpensive housing, mild weather, beautiful scenery, traffic-free roads, a new international airport, and plenty of development, an influx of people and jobs raised the cost of labor substantially. Guillermo watched his profit margins shrink, as prices fell and costs rose.

After doing some research to see how his competitors were handling the changes, it was clear that many of them were consolidating into larger organizations by merger or acquisition. Being independent, Guillermo did not relish the idea of being acquired by a larger competitor, only to retire as the new company squeezed every peso it could out of the overhead costs. Guillermo also did not intend to expand his management responsibilities by acquiring another organization either; as this decision would affect his time with his family in ways that he would not enjoy.

Guillermo spent some time looking at the foreign competition and their high-tech solution. Essentially, their production utilized a computer-controlled laser lathe to produce exact cuts in the wood. Highly automated, the plant in Norway used very little labor as robots performed the precise movement and assembly functions. The cost of the technology was immense, as was the reduction in the labor needed for production. In addition, the production could move between products quickly, and it ran on a 24-hour basis as the shift-differentials were more than offset by the reduction in labor. Converting his production to this model would be expensive, but he saw how he could also decrease his production costs dramatically.

When talking to some of his distributors about their wants, he had another idea that appealed to him. A second competitor, currently operating solely in Norway, had been looking for channels to distribute in North America. This second potential rival, however, did not operate furniture outlets, favoring instead to rely on chain distributors. Guillermo considered how he could coordinate his existing distributor network and essentially become a representative for this other manufacturer. While he might retain some of the high-end custom work, he could move his company's primary focus from manufacturing to distribution.

Guillermo also had a patented process for creating a coating for his furniture. Through production, the process first created a common flame-retardant; then, upon further processing, the coating became complete and stain resistant. There was market for the flame retardant, but not as much of a market for the finished coating. Additionally, there was another product that Guillermo could buy to apply to his furniture that would add the same amount of value for the furniture.

The budget is attached. Compute the return on investment, residual income, and economic value added for the current situation.

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