The SEQUEY HORN CASE

Eugene Decker hung up his office phone and frowned. As part owner of the Squeaky Horn, a musical-instrument repair shop, Decker was responsible for setting the charges for various types of repairs. A potential customer had just called to inquire about the cost to repair the bridge on her cello. After Decker quoted an estimated price for the job, the woman had remarked, “Thank you for the quote, but I’ll be going to Best Instrument Repair. I’ve heard they give good service, and their prices are lower than yours.” Unfortunately, Decker had heard similar statements many times during the past few months. Ever since Best Instrument Repair had opened across town, Decker and his partners had found themselves having to compete for business more than ever before. To attract repair jobs and avoid layoffs, Decker and his partners had lowered prices for minor repairs for the first time in 10 years. Decker looked at the budgeted versus actual operating-profit statement on his desk (Exhibit 1). How could he tell what portion of the company’s lost profits was due to the price decreases and how much was related to other factors?

Background The Squeaky Horn was a musical-instrument repair shop that specialized in the repair and restoration of band and orchestral instruments. The shop was owned and managed by Decker and two partners, who were all well regarded for their exacting repair work and attention to detail. Professional musicians from all over the country sent their instruments to the Squeaky Horn for minor adjustments or major overhauls. Demanding concert and travel schedules placed great stress on the delicate parts of musical instruments, and professional musicians were careful to keep their instruments in peak condition.

Service Lines Currently, the Squeaky Horn offered four main services: major and minor repairs and restorations of band instruments such as saxophones and French horns, and major and minor

This case was prepared by Kristy Lilly (MBA ’03) and Liz Smith (MBA ’04), under the supervision of Professor Mark Haskins. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2003 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected] No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊

Authorized for use only in the course BU607 at Wilfrid Laurier University taught by Chima Mbagwu from Sep 01, 2013 to Dec 30, 2013. Use outside these parameters is a copyright violation.

THE SQUEAKY HORN

UVA-C-2183

repairs and restorations of orchestral instruments such as violins and cellos. Historically, minor repairs were billed at a rate of $35.00 an hour for band instruments and $32.50 an hour for orchestral instruments. Major repairs and restorations were performed under individual flat-fee arrangements that were quoted to customers based on the type of work needed for each instrument. The Squeaky Horn’s three owners performed all major repairs and restorations in the shop. Minor repairs of band instruments were performed by hourly employees, and minor repairs of orchestral instruments were performed by three full-time salaried employees. In addition, rush jobs for minor repairs were occasionally performed for local customers only. These jobs were subcontracted to a retired employee of the Squeaky Horn, who performed the repairs for $25 an hour. Rush jobs were billed under flat-fee arrangements that averaged $150 per job. The average rush job took three hours to complete. The Annual Operating Plan

At the beginning of the current year, Decker’s CPA had prepared the annual operating plan for the Squeaky Horn (Exhibit 1). The Squeaky Horn’s business was small and relatively straightforward, which enabled the CPA to develop the company’s operating budget using specific volume and revenue data for each product line. The following information was used in preparing the annual plan:

1. Based on prior years’ work orders, the shop was expected to perform the following number of jobs in the coming year: 390 major band repairs, 1,830 minor band repairs, 540 major orchestral repairs, 1,560 minor orchestral repairs, and 50 rush jobs. Average major repairs were quoted at $400 and $300 for band and orchestral jobs, respectively. The average minor band repair took two hours to complete, whereas the average minor orchestral repair took four hours to complete.

2. All three partners drew annual base salaries of $60,000 plus bonuses of 5 percent of sales revenue. 3. The hourly employees were paid $20 an hour for work performed. 4. The salaried employees were paid annual base salaries of $38,000. To the extent that the number of minor orchestral repairs exceeded 1,560, the orchestral repairers were paid a flat rate of $80 per job to complete those repairs.

5. Replacement parts and other supplies were budgeted at $50 for each major job and $10 for each minor job (including rush jobs), based on experience. 6. Approximately 35 percent of the instruments that the Squeaky Horn worked on were shipped to the shop from out of town. The company expected to incur average shipping charges of $30 per package to ship the instruments back to their owners. 7. Advertising, depreciation, office rent, and miscellaneous expenses were budgeted as fixed expenses.

Authorized for use only in the course BU607 at Wilfrid Laurier University taught by Chima Mbagwu from Sep 01, 2013 to Dec 30, 2013. Use outside these parameters is a copyright violation.

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