Evaluating Product Line Performance: The Case of Wellesley Paint

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Evaluating Product Line Performance: The Case of Wellesley Paint1 Carol M. Lawrence, University of Richmond Diane Hotchkiss Tiller, CPA “I’m not looking forward to breaking the news to Mrs. W. She’s going to take this pretty hard,” groaned Charlie Oliver, the controller of Wellesley Paint Company. He and Don Smith, state liaison for the firm, were returning from a meeting with representatives of the Virginia General Services Administration (GSA), the agency that administers bidding on state contracts. Charlie and Don had expected to get the specifications to bid on the traffic paint contract, soon to be renewed. Instead of picking up the bid sheets and renewing old friendships at the GSA, however, they were stunned to learn that Wellesley’s paint samples had performed poorly on the road test and the firm was not eligible to bid on the contract.

Charlie and Don were on their way to report to the president of the company, Victoria Wellesley. “Mrs. W.,” as the employees fondly refer to her, is the 70-year-old widow of the company’s founder and has served as president of the company since his death in 1987. “Mrs. W.” is very proud of the quality of the firm’s products and also of its close ties with the state of Virginia, where her family have been prominent citizens since before the Civil War. The label on cans of Wellesley’s house paint features a picture of her ante bellum home.

Wellesley’s two main product lines are traffic paint, used for painting yellow and white lines on highways, and commercial paints, sold through local retail outlets. Because of the small size of the firm, all employees handle multiple tasks. For example, Don Smith’s official job title is state liaison, and during contract negotiations he is the firm’s main contact with state officials. When no negotiations are pending, however, he often drives a forklift in the warehouse or travels to road test sites where he operates the striping equipment used to apply traffic paint to the highway.

Production Process The paint production process is fairly simple. Raw materials are kept in the storage area that occupies approximately half of the plant space. Large tanks that resemble silos are used to store the latex that is the main ingredient in their paint. These tanks are located on the loading dock just outside the plant so that when a shipment of latex arrives, it can be pumped directly from the tank truck into these storage tanks. Latex is extremely sensitive to cold. It cannot be stored outside or even shipped in the winter without heated trucks, which are prohibitively expensive for a small firm such as Wellesley.

Copyright © 1998 by Institute of Management Accountants, Montvale, NJ 74

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The company and situation described in this case are real. The names of the firm and all individuals have been changed to protect their privacy.

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Paint is mixed and packaged at six identical production stations. Each station has two 1,000- gallon mixing vats so that while the first batch of paint is being pumped into drums, another batch of paint can be mixed. An employee pours ingredients into a mixing vat according to a predetermined formula. When the mixing is complete, a sample is tested by the technical director for color, thickness, texture, and drying time. He issues directions for any additional ingredients or approves the batch. Workers then pump the paint into 55-gallon drums from a hose attached to the mixing vat. The amount of paint that can be produced is limited by the available equipment and production space.

Traffic Paint Currently, Wellesley has the traffic paint contracts for the states of Pennsylvania, North Carolina, Delaware, and Virginia. Of last year’s total production of 380,000 gallons, 90% was traffic paint. Of this amount, 88,000 gallons were for the Virginia contract. Each state has unique specifications for color, thickness, texture, drying time, and other characteristics of the paint. For example, paint sold to Pennsylvania must withstand heavy use of salt on roads during the winter. Paint for North Carolina highways must tolerate extended periods of intense heat during summer months.

The process of bidding on a traffic paint contract begins with a road test under the supervision of the National Association of Highway Paints (NAHP), an independent organization supported by state funds. NAHP designates a certain stretch of highway to serve as the road test site. Any paint manufacturer may apply stripes of their paint at the test site. NAHP monitors the test site and reports the results to the state highway department. State personnel review the reports and invite the manufacturers of the bestperforming paints to submit bids. The firm that submits the lowest bid wins the contract.

Contracts, which normally cover a five-year period, specify only the price per gallon and quality requirements such as drying time and road-life. The timing of deliveries is determined later based on state work schedules and weather constraints. Demand is highly seasonal, as states do most of their highway painting in June, July, and August.

The total amount of paint a state will order is not determined until spring, when the states know how much of their highway budget remains after winter snow removal costs have been paid.

After the paint is produced, the state must test the paint before approving it for shipment.

A sample is sent to the state laboratory, which may take up to two months to perform the testing. In the meantime, Wellesley must store all the manufactured paint in its warehouse. At times, the warehouse has been filled to capacity, and drums of paint are stored in the aisles, production areas, and any available inch of space.

Due to the high cost of shipping paint, most paint producers can be competitive on price only in locations fairly close to their production facilities. Accordingly, Wellesley has enjoyed an advantage in bidding on contracts in the eastern states close to Virginia.

However, one of their biggest competitors, Heron Paint Company of Houston, Texas, is

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building a new plant in North Carolina. With lower costs due to their efficient new facility and their proximity, Heron will become a major competitive threat.

Commercial Paint Wellesley’s commercial paint line includes interior and exterior house paints in a wide range of colors formulated to approximate authentic colonial colors. Because of the historical association, the line has been well received in Virginia. Most of these paints are sold through paint and hardware stores as the stores’ second or third line of paint. The large national firms such as Benjamin Moore or Sherwin Williams provide extensive services to paint retailers such as computerized color matching equipment. Partly because they lack the resources to provide such amenities and partly because they have always considered the commercial paint a sideline, Wellesley has never tried to market their commercial line aggressively.

Mrs. W. is worried about the future of the company. The firm’s strategic goal is to provide a quality product at the lowest possible cost and in a timely fashion. After absorbing the shock of losing the Virginia contract, Mrs. W. wondered whether the firm should consider increasing production of commercial paints to lessen the company’s dependence on traffic paint contracts. Her son, who manages the day-to-day operation of the firm, believes they can double their sales of commercial paint if they undertake a promotional campaign estimated to cost $15,000. The average price of traffic paint sold last year was $9 per gallon. For commercial paint, the average price was $11.

Cost Data Charlie Oliver has assembled the following data to evaluate the financial performance of the two lines of paint. The primary raw material used in paint production is latex. The list price for latex is $13.50 per pound. If the firm uses more than 150,000 pounds annually they qualify for a 10% discount; 450 pounds of latex are needed to produce 1,000 gallons of traffic paint. Commercial paint requires 325 pounds of latex per 1,000 gallons of paint.

In addition to the cost of the latex, other costs are as shown below.

Raw materials cost per gallon of paint: Camelcarb (limestone) Silica Pigment Other ingredients Direct labor cost per gallon Freight cost per gallon

Traffic Commercial 0.38 0.54 0.37 0.52 0.12 0.38 0.06 0.03 0.46 0.85 0.78 0.43

Last year, overhead costs attributable to the traffic paint totaled $85,000, including an estimated $25,000 of costs directly associated with the Virginia contract. Overhead costs attributable to the commercial paint are $13,000. Other manufacturing overhead costs total $110,000. Charlie estimates that $9,000 of this amount is inventory handling costs that will be avoided due to the loss of the Virginia contract. Both the remaining manufacturing overhead and the general and administrative costs of $140,000 are allocated equally to all gallons of paint produced.

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Required 1. The firm’s strategic goal is to provide a high-quality product to customers at a reasonable cost and in a timely fashion. What specific quality, cost, and time issues are relevant to traffic paint? To commercial paint? What information does the firm need to assess the performance of each product line on the three strategic dimensions of quality, cost, and time?

2. Calculate the contribution margin (selling price minus variable costs) and gross margin (selling price minus all manufacturing costs) per gallon for each type of paint and total firm-wide profit under each of the following scenarios: 

Scenario A: Current production, including the Virginia contract



Scenario B: Without either the Virginia contract or the promotion to expand sales of commercial paint



Scenario C: Without the Virginia contract but assuming the promotional campaign is undertaken and sales of commercial paint do in fact double.

What insight is provided by a comparison of Scenarios A and B? What insight is provided by a comparison of Scenarios B and C? 3. The Balanced Scorecard is a multidimensional approach to performance measurement that recognizes four dimensions of organizational performance, as shown in the table below.

Dimension Financial perspective Customer perspective Internal business perspective Innovation and learning perspective

Key Concern How do we look to stockholders?

How do customers see us?

How do we look to employees?

Continuous improvement

To implement the Balanced Scorecard, a firm first sets goals for each dimension and then defines performance measures to assess progress toward these goals.

Suppose Charlie has asked your help in designing a Balanced Scorecard for Wellesley Paint. What goals might be appropriate for each of the four dimensions, in light of the firm’s strategic (quality, cost, time) objectives? What performance measures would you suggest for each of the four dimensions?

4. Based on your answers to questions 1 through 3, what should the firm do?

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