For the exclusive use of A. Vigil, 2015.
Harvard Business School

9-191-053
Rev. June 28, 1994

Catawba Industrial Company
Marge McPhee, general manager of the compressor manufacturing department of Catawba
Industrial Company, quickly spotted the reports that she had been waiting for in the pile of mail that had accumulated during her trip to a West Coast industrial equipment trade show. A sales forecast and a cost tabulation for a proposed new, light-weight compressor provided her with the information she needed to ascertain whether or not to introduce it, what volume to produce, and what price to charge. Catawba Industrial Company, located west of Charlotte, North Carolina, was a major supplier of automatic industrial paint systems (used for painting newly manufactured goods such as agricultural machinery, metal furniture, and appliances) and related industrial equipment. The compressor department manufactured a standard compressor for use in the company’s paint systems and for a wide variety of other purposes as well. Marge McPhee, who had earned a Bachelor of
Mechanical Engineering Degree from Georgia Tech., was recently promoted to her present position in recognition of her strong technical and managerial capabilities. The company employed almost 1,200 persons and had more than $200 million in sales.
The marketing department’s sales forecast for the new product, see Table 1, looked promising.
The numbers seemed to indicate an upper price limit of $7,500 to $8,000 and a maximum demand of approximately 30 units per week. While the lower weight and size made the new compressor attractive for certain applications, it was less rugged than the standard unit. It also required customers with standard units to carry another set of spare parts.
Table 1

Sales Forecast Light Weight Compressor
Price*

Units per Week

$5,500
$6,000
$6,500
$7,000
$7,500
$8,000

31
30
28
24
17
10

* Compressors were priced at $500 increments only.

Professor Francis J. Aguilar prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 1990 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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191-053

Catawba Industrial Company

The cost figures for the new product that had been prepared by the production engineering department (see Exhibit 1) were higher than Marge had anticipated. This was of some concern to her since the compressor department was operating at full capacity, and the new unit therefore would have to generate a higher return than the standard product to justify displacement.

Standard Compressors
The compressor plant, capable of producing four standard compressors per day, operated two shifts for six days weekly. (The union contract restricted Catawba from running a third shift.
This time, however, could be used for routine maintenance and special repairs.) Ten of the 24 units produced each week were required as a component for the automatic paint systems sold by the company. The remaining units were sold on the open market through industrial distributors to meet whatever demand there might be for this common product. The 50 direct labor men and women averaged $20 per hour in wages and benefits during the normal week. They received time-and-onehalf on Saturday and double-time on Sunday. The plant was closed on Sunday because the higher labor costs resulted in an operating loss for each unit produced. See Exhibit 2 for the standard model compressor costs.

Light Weight Compressors
Because of its design, the new compressor could be manufactured on Catawba’s new numerical control machinery instead of the older equipment used to make the standard unit. As a result, each unit required only 62.5 hours of direct labor as compared to the 100 hours for the standard model. The cost savings in labor and materials were partly offset by the higher depreciation charges resulting from the use of more expensive machinery. The company had added certain features to the machinery center to accommodate the manufacturing process for the new compressor.
The extra hardware and hoists already installed had cost $417,000. Additional jigs, sensors, and software were expected to add another $218,000 to this total. Both these amounts had been taken into account in calculating the depreciation charge for the new compressors.
As Marge prepared to analyze the numbers, she was relieved to see that despite the high costs for the new compressor, it could still generate a higher profit than the standard unit. With that bit of encouragement, she set out to calculate the price and volume for the new compressor that would result in the best financial return. Because of practical difficulties in changing purchasing orders, production scheduling, and price lists, Catawba had a policy of limiting any changes to manufacturing and marketing plans to twice a year. Revisions were normally made in November and May. Exceptions could be made, but were embarrassing to the managers making such requests.

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Catawba Industrial Company

191-053

Exhibit 1
Light Weight Compressor Per Unit Cost Estimate

MEMORANDUM

TO:
FROM:
SUBJECT:
DATE:

Marge McPhee, General Manager, CMD
Larry Salin, Production Engineering
Light Weight Compressor Per Unit Cost Estimate
November 27, 1990

Direct Labor
Material
Other Direct Charges
Depreciation
Other Mfg. Overheads
Cost of Goods Sold
Sales
General & Administrative
Total Cost Per Unit

$1,250 (wages and benefits)
1,463
137 (power, materials handling, etc.)
1,406
152 (insurance, security, heat, etc.)
$4,408
1,102
441

(25% of COGS)
(10% of COGS)

$5,951

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Catawba Industrial Company

Exhibit 2
Standard Model Compressor Profit and Loss

Weekdays

Saturday

Sunday

Price

$10,000

Direct Labor
Materials
Other Direct Charges
Depreciation
Other Mfg. Overheads

$ 2,000
3,244
156
497
177

$3,000
3,244
156
497
177

$ 4,000
3,244
156
497
177

Cost of Goods Sold

$ 6,074

$7,074

$ 8,074

1,519
607

1,769
707

2,019
807

Total Cost

$ 8,200

$9,550

$10,900

Profit per Unit
Return on Sales

$ 1,800
18%

$ 450
4.5%

($900)
Negative

Sales
General & Admin.

Compressor Department Profit (Weekly)
Monday - Friday
Saturday
Sunday

: 20 units x $1,800
: 4 units x 450
: None

Departmental Profits per week

=