Woofy Wear Co. Woofy Wear Co. makes high-end dog collars and sells them online directly to dog owners. Woofy Wear is considering adding health care coverage as an employee benefit. However, this coverage would be expensive, and other costs are expected to rise in the future. You might think that dog owners would be happy to have a single collar for their pets, but you would be mistaken. Today’s dogs can have a collar for each season. The spring collar might feature a pattern of colourful flowers. The winter collar might show a jolly snowman. The marketing possibilities are almost endless. A dog collar hastwo parts. The strap that goes around the dog’s neck is made from an attractive, durable fabric. The ends of the strap fit into a two-part plastic snap that secures the collar. Woofy Wear buys the strap fabric and snaps from different suppliers. The strap fabric comes in a flat sheet that must be cut, folded, stitched, and ironed by one of the assembly workers. The snap has two parts. One end of the strap is fastened to one part of the snap, and the other end is fastened to the other part. The assembly process sounds simple, but it is exacting work. The cutting, folding, and stitching must be precise. The strap ends must be inserted into the snaps without crinkling the fabric. Woofy Wear has four good manufacturing workers whom it pays well so that they stay with the company. Each worker can make 20 collars per day, and they work 250 days per year. It is amazing how many products contain petroleum as a raw material, and the collar parts are no exception. Oil is refined into compounds that become feedstocks in the manufacture of many products, including plastics and synthetic fibers. The companies that make the snaps and fabric pass along changes in their costs, meaning that a change in the price of petroleum will affect the cost of the snaps and fabric. In recent years, world oil prices have fluctuated greatly. Many economists and petroleum experts think that the price of oil will increase significantly in this decade, which makes Woofy Wear nervous about cost control in the next few years. On the other hand, some experts think that oil prices will not change much, and might even decline. The price of oil is commonly quoted by the barrel. In 2021, the average price of a barrel of oil on the open market was $80. Woofy Wear’s petroleum-based raw material costs are about 50% of the percentage change in the price of a barrel of oil. For example, if the price of oil rose from $80 in one year to $90 in the next year, the increase would be 12.5% ((90 – 80) / 80 =0.125). Therefore, Woofy Wear’s raw material costs will increase by 6.25% (0.5× 0.125) in the second year. This factor is also referred to as the raw material cost change factor. The snap and strap costs in 2021 were respectively $0.50 and $1. These costs will increase by the raw material cost change factor in the coming years. For example, if the raw material cost change factor is 10%, then in 2022, snap cost will increase by 10% (i.e., the snap cost in 2022 will be $0.55). Even in poor economic times, people are willing to pay for a good specialty product like Woofy Wear’s dog collar. Woofy Wear’s online advertising, other advertising, and word of mouth seem to ensure that its sales will continue to increase. It sold a total of 20,000 collars in 2021 and assumesthat unit sales will increase 3% each year for the next three years. The average selling price for collars of all sizes was $20 in 2021. The mix of sizessold is expected to stay the same in the future. Woofy Wear assumes that it can raise its selling price 3% each year for the next three years. Increasing production may require adding one or more manufacturing workers. Woofy Wear also employs an office worker and a janitor/repairman. If it adopts health care as a benefit, it will cover all the employees. It hasidentified a basic threeyear health care package that would cost it $3000 per covered employee in 2022, $3200 in 2023, and $3400 in 2024. Each year, Woofy Wear’sfinancial goal is to achieve a 10% profit margin. Looking ahead, Woofy Wear certainly does not want good employees to quit because they are seeking health care coverage elsewhere. If it pays for health care and oil prices increase, can itstill reach its goal in the foreseeable future? If oil prices increase, can it reach its goal only if it does not adopt health care? Covering its employees’ health care would be the right thing to do, but reaching itsfinancial goal is also important. a. Draw the Influence Diagram and the Black Box Diagram for this problem. b. Prepare the layout of the spreadsheet model for this problem. c. Build the base case spreadsheet model to help Woofy Wear. d. Construct various scenarios for the rise in oil prices and the decision to cover for healthcare and determine how Woofy Wear’s profit goal is affected based on these scenarios. You want to answer the following questions: i) If Woofy pays for health care and oil prices increase, can it still make its profit goal in the foreseeable future? ii) If oil prices increase, can Woofy make its profit goal only if it does not adopt health care? iii) How much impact do oil prices actually have for Woofy? iv) Is there a case to be made for paying for health care, no matter what? e. What other what-if analyses could be helpful for Woofy?
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