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
Units per Week
* 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.
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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.
Light Weight 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...