Capital Budget and Recommendations

ACC/543

April 14, 2014

Guillermo Furniture, located in Sonora, Mexico and owned by Guillermo Navallez, manufactures midgrade and high-end sofas. Mr. Navallez has made furniture in Sonora for the last several years. The area in which his store is located is well supplied with the necessary timber for the furniture the company produces. For the last several years, Guillermo Furniture has been able to price their handcrafted products at a higher premium that Mr. Navallez believes is deserving for the quality craftsmanship provided. Competitors have now moved into the market using high-tech equipment to produce their furniture. As well, with new competition entering the market more jobs became available to the Sonora area causing a growth in population and a rise in the cost of labor. Mr. Navallez does not like the idea of being acquired by a larger competitor it is his ultimate goal to remain an independent company and become competitive. In order to remain competitive Guillermo is considering incorporating the use of a computer controlled laser lathe to produce exact cuts in the wood used to produce their furniture. This will come at a great cost to utilize the new technology, but will reduce the labor that is needed for production. Guillermo has recently hired myself as their new accountant and has tasked me with determining the which decision or direction the company should head towards. Ultimately Guillermo Furniture wants to know which direction provides the greatest returns.

There are three alternatives or directions in which Guillermo Furniture can seek out, but before making a final decision Guillermo will need to weigh the opportunity cost. Opportunity cost is the cost of passing up the next best choice when making a decision. Though this is not treated as an actual cost on company financial statements, it is an important decision-making process for the company (investorwords.com). The three choices that Guillermo Furniture must compare...