Today on Wale’s musings, we would be reflecting on another business case in our Analysis of Business Problem (ABP) class at the Lagos Business School (LBS).
Introduction
Spartan industries, Inc. operates in the automotive industry, and Ace Automotive is one of the company’s divisions. In addition, Spartan industry acquired Ace in 1987 due to its cost-effectiveness and high-quality products, as Ace is the industry’s leading provider of water pumps, gasoline pumps, and oil filters for automotive applications. In addition, Ace is recognized as the leading supplier of machined castings, which are anticipated to be utilized in alternator assemblies.
Problem Statement
Ace is regarded as a profitable manufacturer and supplier of automotive components, and because of rising demand, the company’s profit margins grew steadily and its international customer base expanded, allowing it to generate greater revenues.
It is anticipated that the automotive industry will be the most profitable industry; consequently, many new market participants have arisen, establishing new performance standards and competition levels in the industry. In addition, the increase in competition and global experience compelled the company to reduce prices and enhance quality to attract a larger number of consumers and increase its market share.
Most automotive industries undergo workforce reductions to cut costs, which causes scheduling issues for the companies. Moreover, Ace Automation is also confronting the same issue, as it is evaluating three projects with fewer available hours than are required. As a result, the company’s management is contemplating an optimal production plan that could satisfy the needs of each customer while minimizing costs.
Production facility capacity and associated expenditures
It is anticipated that the company’s St. Peters facility will contain die casting machinery with capacities ranging from 400 to 1,000 tons. The production department is evaluating three contracts to determine which one will increase the company’s profitability while incurring the fewest expenses.
General Motors, Chrysler, and Laclede are anticipated to be three available contracts that are ordering high-volume engines of the company, with each company’s order quantity being distinct. The company’s management is contemplating which casting press operations contract should be selected.
It is anticipated that casting machines will be utilized for 80 hours per week and 50 weeks per year; thus, machines are available for 36 000 hours per year. By excluding scheduled hours, maintenance, idleness, and other scheduled slippage hours, the foundry has 25,560 available hours, and the tonnage capacity of each press varies.
The Contracts
General Motors (GM) Chevrolet-Pontiac-Canada (CPC) group issued a Request for Quotation (RFQ) to Ace Automotive to supply water pumps for the High Value -6 (HV6) engine. A new contract with Laclede Gas Company for large components used in construction projects represents another opportunity.
Existing foundry capacity constraints exist at the St. Peters, Missouri facility. Ace possesses 9 die-casting machines with capacities spanning from 400tons to 1000tons, of which 5 are 400/500-ton presses and the rest are 800/1000-ton presses.
Given Ace’s current workload, the capacities of the extant die casting machines raise concerns about our ability to execute new contracts with the available plant capacity. Ace would like to address this issue when quoting for HV-6, as GM has demanded fewer units than were projected on average. This risk has never been adequately accounted for in quotations, and Ace would like to address it.
DECISION PROBLEM & OBJECTIVE
Considering the plant capacity constraints:
- Which contracts will be most favorable for ce to pursue in 1992?
- What price should be quoted for GM’s HV-6 water pump?
ALTERNATIVES (CONTRACT DECISION)
- Continue the Chrysler Contract, Bid on HV6 using 800/1000-ton presses, forgo Laclede.
- Keep Chrysler and Laclede Contracts, Bid on HV6 using 800/1000-ton presses while using overtime and/or outsourcing as necessary.
- Run Chrysler and HV6 on 400/500-ton presses, Laclede on 1000-ton presses, and perhaps some overtime and outsourcing.
ALTERNATIVES (HV-6 PUMPS)
- Continue the Chrysler Contract, Bid on HV6 using 800/1000-ton presses, forgo Laclede.
- Keep Chrysler and Laclede Contracts, Bid on HV6 using 800/1000-ton presses.
- Process Chrysler and HV6 on 400/500-ton press, Laclede on 800/1000-ton presses
| OPTION 1 | |||
| HV6 | |||
| 800/1,000 | |||
| No Overtime | Chrysler Job | ||
| Material cost | $7.66 | $6.29 | |
| Labor cost | 0.9842 | 0.7377 | |
| Overhead cost | 2.6878 | 1.8595 | |
| Die maintenance | 0.22 | 0.165 | |
| Total var. cost/unit | $11.549 | $9.048 | |
| Allocated overhead/unit | 2.2614 | 2.1511 | |
| Total cost/unit | $13.811 | $11.199 | |
| SG&A | 0.5524 | 0.448 | |
| Profit | 2.1407 | 0.8959 | |
| Selling price | $16.50 | $12.54 | |
| 1992 volume (units) | 140,000 | 100,000 | |
| Press size (tons) | 800/1000 | 400/500 | |
| Press standard hrs./unit | 0.0205 | 0.0195 | |
| Overtime | No | No | |
| Contribution | $4.95 | $3.50 | |
| Contribution % | 30% | 28% | $1,043,130.00 |
| Opportunity lost – Laclede | ($305,848.00) | ||
| $737,282.00 | |||
| Hours Required | 2870 | 1950 | |
| OPTION 2A | ||||
| HV6 | ||||
| 800/1,000 | ||||
| with Overtime | Chrysler Job | Laclede Job | ||
| Material cost | $7.66 | $6.29 | $10.41 | |
| Labor cost | 1.2074 | 0.7377 | 1.0913 | |
| Overhead cost | 3.2786 | 1.8595 | 2.8816 | |
| Die maintenance | 0.22 | 0.165 | 0.2 | |
| Total var. cost/unit | $12.363 | $9.048 | $14.582 | |
| Allocated overhead/unit | 0 | 2.1511 | 12.8734 | |
| Total cost/unit | $12.363 | $11.199 | $27.455 | |
| SG&A | 0.494532 | 0.448 | 1.0982 | |
| Profit | 1.921 | 0.8959 | 3.02 | |
| Selling price | $14.78 | $12.54 | $31.57 | |
| 1992 volume (units) | 140,000 | 100,000 | 18,000 | |
| Press size (tons) | 400/500 | 400/500 | 1000 | |
| Press standard hrs./unit | 0.0313 | 0.0195 | 0.1167 | |
| Overtime | Yes | No | No | |
| Contribution | $2.42 | $3.50 | $16.99 | |
| Contribution % | 16% | 28% | 54% | $687,674.48 |
| Hours Required | 4,382 | 1,950 | 2,101 | 8,433 |
| Available hours | 8,496 | |||
| OPTION 2B | ||||
| HV6 | ||||
| 400/500 | ||||
| with Overtime | Chrysler Job | Laclede Job | ||
| Material cost | $7.77 | $6.29 | $10.41 | |
| Labor cost | 1.3175 | 0.7377 | 1.0913 | |
| Overhead cost | 3.3942 | 1.8595 | 2.8816 | |
| Die maintenance | 0.18 | 0.165 | 0.2 | |
| Total var. cost/unit | $12.664 | $9.048 | $14.582 | |
| Allocated overhead/unit | 0 | 2.1511 | 12.8734 | |
| Total cost/unit | $12.664 | $11.199 | $27.455 | |
| SG&A | 0.50654 | 0.448 | 1.0982 | |
| Profit | 1.968 | 0.8959 | 3.02 | |
| Selling price | $15.14 | $12.54 | $31.57 | |
| 1992 volume (units) | 140,000 | 100,000 | 18,000 | |
| Press size (tons) | 400/500 | 400/500 | 1000 | |
| Press standard hrs./unit | 0.0313 | 0.0195 | 0.1167 | |
| Overtime | Yes | No | No | |
| Contribution | $2.47 | $3.50 | $16.99 | |
| Contribution % | 16% | 28% | 54% | $695,935.60 |
| Hours Required | 4382 | 1950 | 2100.6 | 8,433 |
| 8,496 | ||||
Decision:
Ace Automation should pursue Option 1 which gives a higher contribution within the required service hours.
Until next time when we will be considering another reflection on my learnings at LBS, have a great week ahead.
OLAWALE
