INGOT CAN COMPANY

Art Madsen, M.Ed.

Part I

A. Production Process Schematic:

B. Production Costs and Drivers:

              Cost Category             Probable Driver                                                                 

Labor, Manpower, Supervisory Personnel  Market Price of Labor, Manpower Availability, 
                                        Skill Levels, Experience Quotient, Specialists, 
                                        Ancillary Personnel, Quality Mix                    

Maintenance, Repair and Prevention      Replacement Part Costs, Frequency of    
                                        Failure, Equipment Quality              

Electricity, Facilities, Insurance      Power Rates, Quarterly Premiums,        
                                        Rental Costs, Market Dynamics           

Depreciation, Amortization              Not a Factor (Equipment nearly          
                                        Obsolete)                               

Test Materials                          Can-size Variety, Market price of       
                                        Materials, Worker Efficiency Quotient   

Test Labor                              Labor Market for Specialists            

Miscellaneous Costs                     Market-Driven / Supply and Demand

C. Average Cost Per Case:

SUMMARY

Production Cost Break-Down: (per 100,000 cases)

TOTAL PRODUCTION COST......................................$108,832 per 100,000 cases +117,000 materials =$225,832

COST PER CASE = $2.26 (or 2.27)

D. Set-up Costs for each production run:

E. Assuming 20,000 case production run costs are too high, Management could consider:

Part II

A. Option 3 on Figure 3, below, is clearly the least expensive per 100,000 cases. The computations used to derive data appearing on Figure 3 are attached and are labeled "Part II, Section A."

Strategic Plan.................Cost for 6.3 M cases....... Cost for 100,000 cases ........Cost per case

Option 1 ........................$14,327,600.00................... $227,422 ..................................$2.27

Option 2 ..........................14,335,600.00..................... 227,549 ....................................2.27

Option 3 ..........................13,228,794.50 ....................210,000 .....................................2.10

Slight Discrepancies are due to rounding of values to the nearest cent in the 'cost per case' column

FIGURE 3

The primary forces driving costs incurred for each step of the production process are as follows:

1. The price per case, for all three options, is determined by labor costs, equipment operation costs, down-time or idle-time (Options 1 & 2: 35% idle factor, whereas Option 3 has an approximate 10% down-time: see computations), depreciation for the third option if the lease does not absorb these costs, tests, set-ups, and other expenses. All cost categories are driven by market forces at time of production.

2. The rental or lease cost of equipment, under Options 2 and 3, is determined by market forces.

3. The demand for cans produced by INGOT is determined by market dynamics and establishes the overall 6.3 million cases per month figure, as projected by the case study author for the aging baby-boom generation. (Total 6.3M = 2.0 M (16 oz) + 2.0M (28 oz) + .8M (misc. sizes), 1.5M (individual serving size).

Figure 4, below, depicts a schematic representation of the components and factors driving production costs. All are determined by (1) local economic conditions,(2) supply and demand as well as by (3) labor market dynamics, and all pertain to the third Option, considered the most efficient and promising.

FOR OPTION 3

(The Preferred Strategy)

$2.10 price per case = rental costs + labor + maint + materials + facilities + misc.

FIGURE 4

B. There are, in fact, several options, other than the three described, that can be considered by Management. To reduce labor costs, and ideally material costs, it is possible to consider relocation of production facilities to either another city within the USA where costs and taxes would be lower, or to a third-world nation where labor and equipment expenses would result in a small fraction of present operating costs. Another possibility would be to increase sales through a strong marketing campaign, and perhaps double production to 12.6 million cases/month, thus realizing economies of scale and reducing price per unit.

C. Options 1 and 2 are clearly less efficient than the third option, because Option 3's new and flexible equipment, although more costly, provides much more acceptable customer satisfaction results. Immediate delivery is possible at lower cost per case (2.10 vs. 2.27). More supportive details are provided below.

D. As described in the case study, labor utilization and personnel functions, under the third option, would be restructured, resulting in considerable cost savings and improved efficiency. The actual production process would be streamlined due to the modern and flexible nature of the equipment. There would be modifications in the process, but also in the packaging, storage and shipping phases of the operation. Through enhanced worker productivity, material costs would be lower on average. While rental costs for flexible equipment seem higher, the actual cost per case is lower due to elimination of extra personnel, unnecessary under Option 3's more versatile system.

E. Due to increased production efficiency, far fewer employees would be required to operate and supervise the process. This would result in plant lay-offs and in a significant reduction in staffing. Labor unrest could ensue. Management must consider these implications when selecting one of the three options; but it seems, under Option 3, as if many of the affected employees could be reassigned or retrained as deemed useful or appropriate by Management, thus minimizing negative cultural or social impact.

Computations

Part II - Section A:

OPTION ONE

Can existing equipment process the extra 1.2 M cases of individual size cans if there is a decline in the 16 and 28 oz sizes? Yes! If $6000 is spent on add'l maintenance to keep machinery operating.

2.0M = 16 oz.

2.0M = 28 oz

0.8M = misc sizes

---------

4.8M = 1.5M indiv. size cases = TOTAL PRODUCTION: 6.3M cases/month.

Cost per case (carried over from Part I): 2.27 x 6.3 M = $14,301,000 production cost per month.

Additional Maintenance: = 6,000/month

$2000/test materials + 600/labor (24 hours x 25/hr) x 10 = 20,600/month

TOTAL: = $14,327,600/month

_____________________________________________________________________________

OPTION TWO

Cost per case (carried over from Part I): 2.27 x 6.3M = $14,301,000 production cost per month.

Lease cost per month (including maintenance): = 14,000/month

2000/test materials +600 labor (24hours x 25/hr) x 10 = 20,600/month

TOTAL: $14,335,600/month

________________________________________________________________________________

OPTION THREE

Calculations for revised cost per case:

NOTE: All cost elements for 'cost per case' as shown in 'Part I Computations' remain the same except LABOR, which is reduced as follows:

REVISED TOTAL: 49,200 Labor costs for 100,000 under Option 3.

NEW PRICE PER CASE CALCULATED: 2.27 minus savings/case (17.6 cents) = Approx $2.10.

Cost per case: : 2.10 x 6.3M = $13,198,752.00 production cost per month.

Lease cost per month (including maintenance): = 30,000.00/month

Labor (.17 hrs x 25/hr x 10) = 42.50/month

Total Production Costs for 6.3 M = 13,228,794.50/month

Calculations for 100,000 cases are simply derived by multiplying the cost/case (2.10) x 100,000, as shown on Figure 3. This applies, of course, to all three Options, although for Options 1 and 2, the cost per case differs.

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