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Case Manufactured Homes Essay

1895 words - 8 pages

1. The key aspects of Manufactured Homes(MNH) are the selling of manufactured homes at a big price range with the focus on the lower end of the market and the financial participation. MNH sells the mortgages of the customers to unrelated financial institutions and earn money by the difference in the interest rates.
MNH sold mobile homes in the Southeast US, primarily to low-income individuals who could not afford a traditional single-family home. The company sells affordable comfort. The company believed that its focus on the lower end of the market had two advantages. First, since its customers were seeking to fulfill an essential housing need, sales were less affected by changes in ...view middle of the document...

More home owners selected a conventional home over manufactured homes and the mortgages were financed at lower interest rates which meant a mortgage prepayment for MNH. This became a problem and they had to increase their credit sales provision.
MNH has a big scope advantage. Because of its size it benefits financially from volume buying. This is one of the most important reasons that many independent dealers are seeking a working relationship with MNH and a lot of companies are willing to be acquired.

2. Most of Manufactured Homes’ sales were credit sales where the customer paid a down payment of 5 to 10 percent of the sales price and entered into an installment sales contract with the company to pay the remaining amount over periods ranging from 84 to 180 months. This leads to lower monthly payments for their customers which is an added advantage. The sold manufactured homes are recorded as sales and as accounts receivable. The income of a sale is recognized when the payment is received.
Under existing financing arrangements, the majority of installment contracts are sold, with recourse to unrelated financial institutions at an agreed upon rate which is below the contractual interest rate of the installment contract. Under this agreement, Manufactured Homes was responsible for payments to the financial institution if the customer failed to make the payments specified in the installment contract.

The accounting under this principle is quite reasonable. The sales are recorded when a down payment is made, mostly 10% of the total payment. When a down payment is made there will be a smaller chance that the buyer will renounce its purchase, because he already paid a part of it. The period a customer has to make the down payment, 84 to 180 months, it very long because a lot can change in such a large time range (is a warning sign).
The assumptions that have to be made are that the customers will be able to pay the down payment within time and that they will be able to pay the rest of the money. They account for it as a sale when the down payment is made but the inventory account is decreased as a customer bought a manufactured home and a receivables are increased, but it is not yet sure that the payment will be made.
We do not agree with the assumptions made because the company cannot assume that the customer will be able to pay for the amount that is accounted for.

3. To improve liquidity a firm may sometimes decide to sell part of its receivables to an financial institution, after which the financial institutions services the collection of the receivables. Once the receivables have been sold, the seller (MNH) must decide whether it accounts for the transaction as a sale (a reduction of receivables) or as a received loan collateralized by receivables (debt).
The transfer of the receivables are accounted for as a decrease of accounts receivable rather than as an increase in debt. This is not the proper way to account for this...

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