Thanh Thao Nguyen_43078510

CATAWBA INDUSTRIAL COMPANY Background: Catawba industrial company, a major supplier of automatic industrial paint systems and related industrial equipment, is currently manufacturing standard compressors. Their general manager of the compressor manufacturing department considers whether to produce new light weight model to bring more profits to the company, which had more than $200 million in sales at this time. However, this activity must be within the capacity constraint of company. Ten of the 24 products produced each week have to be guaranteed as a component for the automatic paint systems sold by company. Problems and issues: The analysis is based on the assumptions that there are some costs that are not relevant to the decision making such as extra hardware and hoist costs, sales expenses, general and administrative expenses, and part of depreciation, except for the $218000 because it is just used when the company chooses to produce the new items. Moreover, the selling price of standard compressors remains at $10000 per unit. Doubled costs of direct labors prohibit Catawba producing on Sunday as they must pay total of $4000, otherwise, they face an overall loss in profits of $900. The new compressor is being manufactured on the new numerical control machinery requiring less material than the standard units. Thus, the variable cost per unit will be lower than of standard units. Additionally, direct labor costs can also be reduced from 100 hours to 62.5 hours per week, excluding the possibility of operating on Sunday. As a result, the profit per units when producing new compressor is up to $2049 compared to $1800 per unit of standard item. One more issue is that company must guarantee to produce at least 10 units per week to be used as a component for the automatic paint systems sold by the company to keep generating the profit and obtain the best financial return. Recommendations: My primary recommendation is that not manufacturing the standard compressor on Sunday is the good choice for the company to avoid the loss. Instead, they should use this time for routine maintenance and special repair as the more production, the more depreciation. The compressor department should increase profitability and sales on weekdays where direct labor costs are the lowest. With regards to the volume and price of products that should be produced to meet the requirement of the company, based on the forecast of profitability conducted by the marketing department, they can definitely sell the light weight items at $7500 to $8000 range as mentioned in the case. According to the calculation, the selling price of $8000 and the volume of 10 units per week can bring $47490 in overall profit. Hence, my recommendation is to produce 10 units of light weight model and 14 units of standard model on weekdays, together with 4 units of standard compressors on Saturday, no operation on Sunday at all. However, Catawba should not expand their product line until marketing frameworks and a competition analysis are conducted to make sure that a higher rate of manufacturing will bring the higher numbers of units sold.

Thanh Thao Nguyen_43078510

APPENDIX

Table 1: Sales forecast Light Weight compressor

Table 2: Forecast of profitability