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In this "Catawba Industrial Co." case study, a department general manager is faced with the dilemma of whether adding new lightweight compressors in its market is profitable. Or should the company just continue producing standard compressors? If it decides to produce new compressors, additional problems must be addressed - how much quantity, at what pricing level, on what days it is to be produced, and when to implement the change. The department general manager is tasked with analyzing the advantages and disadvantages of such a possible move and must decide wisely.
Francis J. Aguilar
Harvard Business School (191053-PDF-ENG)
Sep 4, 1990 (Revision: Jun 28, 1994)
Case questions answered:
- Background This paragraph should include a brief overview of the salient background information provided in the case. This information should be relevant for your consideration of the problems and issues of Catawba Industrial Co. You need to describe the relevant characteristics of the business (its products/services, processes, existing systems (e.g. cost system), strategy and any important stakeholders (if relevant), etc.); relevant characteristics of the industry in which the business participates (intensity of competition; how the industry is changing, etc.); relevant general business conditions (market/economy growing or in recession, etc), and any other relevant information that should be considered as background for the case.
- Problems and Issues In this paragraph, you must identify (i) the problem(s) facing the company and (ii) the issues that could be causing the problem(s) the company is facing and how you can see this manifesting in the details of the case (i.e., why did you come to this conclusion?). You should provide a brief discussion of the problem and issues (i.e. how they relate?) but do not analyze. Remember, from the Huff and Weber, How to Prepare a Case guide, a problem is something fairly specific and reasonably well understood – even if its solution is not (e.g., profits keep falling even though we believe we are doing a good job). An issue is a more general thing – it also requires attention but needs to be better understood before specific solutions are considered (e.g., our costing system is reporting inaccurate costs, why?).
- Analysis to support your finding of the problems and issues of Catawba Industrial Co. Once you have identified the problem and issues, consider the information in the case that is relevant to them and also considers the theory, concepts, and techniques we have learned in class thus far. Try to diagnose the underlying cause of the problems and issues you have identified and support it with analysis. In addition, analyze the effect of alternative decisions you may make in this case comparing the current situation with what would you suggest. In this case, data and exhibits are provided for you to analyze and find evidence to support your claims – use them here. You may present information about your analysis in tables or graphs where appropriate and simply refer to them in the body of your case. The tables etc can be presented on the additional page.
- Recommendations In this paragraph, you should provide your recommendations for addressing the problem(s) and the issues you have identified. These recommendations are actions that should help to resolve or alleviate the problems and issues you have identified in Section 2 and should be appropriately supported by the analysis you have presented above in section 3 (i.e., does it all link? Is it a cohesive argument?). You may also consider if there are any limitations to implementing your suggested recommendations, or to your analysis.
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Case answers for Catawba Industrial Co.
Background – Catawba Industrial Co.
The case study is about Catawba Industrial Co. that is a renowned manufacturer of industrial paint systems and equipment. The compressor department is one of the most important divisions of the company as compressors are like the heart of any painting system. Catawba manufactured compressors for their painting system in-house. These compressors were also sold separately by Catawba to other customers.
A new lightweight compressor was proposed to Marge McPhee, general manager of the compressor manufacturing department. The marketing department provided her with a weekly sales forecast chart that included sets of different pricing for the new compressor along with estimated unit sales at different pricing levels. The product engineering department had provided Marge with a per-unit cost estimate for a new lightweight compressor. Catawba Industrial Co. applied an absorption costing system in their financial analysis.
Problems & issues
The main problem here is that the production costs provided by the production engineering department for lightweight compressors were higher than the cost anticipated by Marge. Since the plant was already running at its peak capacity, the new unit had to return higher profits for it to replace the standard unit. And the issue here is related to their costing system which the company has adopted which is traditional costing. Although the costing system adopted at Catawba Industrial Co. is suitable for the standard model, it is not appropriate for the new model.
The issue in the current costing system is that all costs are considered as variable costs (since each cost is given per unit). Sales expenses and general and administration expenses are generally fixed costs that are difficult to assign on per unit basis. A comprehensive analysis of the issue is highlighted in the next section.
Another dilemma that the manager of the compressor department has is to decide the appropriate product mix for standard and new compressors. So Marge had to make a decision about whether new lightweight compressors are profitable or the company should continue producing only standard compressors, and if producing new compressors then in how much quantity, at what pricing level and on what days it is to be produced. Once she takes a decision, she also has to take a call on when to implement the change. Catawba Industrial Co. usually implements such changes only twice a year. A change outside those two occasions is rare and is considered negative for the manager making a call for it. Marge had to analyze the pros and cons of this situation and decide wisely.
The current costing system adopted is traditional costing which is appropriate in the case when Catawba Industrial Co. is manufacturing only standard compressors at their maximum capacity. This is because…
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