Comfort Now LA (CNL) was a small business that manufactured bleacher seat pads that sports fans or picnickers could use to make wooden outdoor seating (or even convenient rocks) a bit warmer and more comfortable. The primary markets for CNL’s product were college bookstores (to be sold to students and alumni) and specialty advertising firms (for use as corporate give-a-ways). The firm was organized in the second half of 2001 and began selling products in 2002.
CNL had a policy of providing an annual “cost of living” increase for its assembly workers to maintain a constant annual cost of $25,000 per worker (1984 dollars). The production process requires one worker for every sixteen tons manufactured. As of January 2005, up to ten of the assembly workers were provided by a local Sheltered Workshop facility (a facility that provided and supervised disabled workers for product assembly and piece-work). This facility also rented the necessary manufacturing space to CNL. Nationwide Horizon Enterprises, a local manufacturing conglomerate with some excess capacity, provided the remaining workers and production space when more than ten disabled workers were required. Nationwide Horizon was also paid $25,000 (inflation-adjusted) apiece for its workers plus an additional fee for the rental of equipment and space. In addition to manufacturing labor, CNL employed a clerical worker and a general manager but no sales staff. Through December 2005, sales were generated primarily by manufacturer’s representatives who received a standard 5% of sales as their commission.
In January 2005, Nationwide Horizon Enterprises purchased CNL. Nationwide Horizon’s management team immediately began supplementing sales efforts by adding the CNL products to their own manufacturer’s representative lines. Otherwise, they operated CNL without significant changes. The Nationwide Horizon Enterprises managers soon found that while sales were growing, profits were shrinking. The management responded for the second half of 2005 by increasing the commission to their manufacturer’s representatives from 5% to 6%. The salesforce responded quickly and sales boomed.
By July 2006, Nationwide Horizon’s board of directors expressed some concern to management. Even though sales were up, the deal was not proving to be profitable. At the end of July 2006, the board of directors was informed that Nationwide Horizon’s management team had decided to reduce CNL’s production staff by letting go of those employees provided by the Sheltered Work Facility. It is now in autumn 2007. Nationwide Horizon has been sued by a noted civil rights attorney claiming that closing down the Sheltered Work Facility manufacturing operation was a wrongful termination of the workers in the Sheltered Work Facility.
Her court filings say that there was no valid business reason for selecting the disabled workers for layoff rather than the nondisabled workers; in part, the court filings claim that the layoff was wrongful because there was no economic justification for dismissing these workers who had been at least as productive, and profitable, as their non-disabled counterparts for so many years.
The attorney claimed that this was obvious discrimination against the disabled and because of the discrimination, her ten clients will be unemployed for an average of 20 years each. The attorney is asking the court for a verdict of $20,000,000 as an appropriate award to her ten clients if she prevails in her action. She estimated this figure by computing 20 years x 10 clients x $25,000 = $5,000,000, doubling it to account for her fees, then doubling that to account for future inflation.
Required
You have been hired by Nationwide Horizon’s board of directors to help their attorney (and them) evaluate the claims in the lawsuit and determine whether the management team made the right decision. You have been asked to consider the following specific questions in preparing a report: (Use the guidelines for preparing a report on the course website.) You remember from your Business School days the following concepts that you think might be useful here:
Question
Was there a reasonable economic basis for the termination of the ten disabled workers (rather than the Nationwide Horizon employees also working for CNL)? If you do not think there is enough information, what other data would you like to be provided? (Consider the opportunity cost of using the ten workers provided by the Sheltered Workshop in contrast to the opportunity cost of using existing Nationwide Horizon staff and facilities.)