Case: Athens Glass Work

Arkadia Group IV

Bosmen Rianto, El Nora Theresia., Ivan Rilman, Marwan Hanif, Yusuf Adhitama

Key question from the case

1. Whether AGW Significant Loss Market Share due to price increase?

2. Whether unit cost grew with increasing volume or result of company allocation system?

3. Any possibility competitor will lower their price to $ 2.15?

Step in constructing the case

1. Check the independence of attribute using probability methods

2. Check the sanity of cost allocation system

3. Using probability to predict competitor behavior in reducing cost

AGW Significant Loss Market Share due to price increase?

Year QuarterSales Volume (000 square feet) Price ($ per square foot)

Market Share

Price Increase

MS declineAGW Competitors AGW Competitors

1991 3 241 443 2.05 2.05 35.2% 1991 4 313 592 2.05 2.15 34.6% 0% -2%1992 1 204 381 2.15 2.15 34.9% 5% 1%1992 2 269 513 2.15 2.15 34.4% 0% -1%1992 3 251 456 2.15 2.15 35.5% 0% 3%1992 4 238 672 2.36 2.15 26.2% 10% -26%1993 1 139 474 2.36 2.15 22.7% 0% -13%1993 2 162 642 2.36 2.15 20.1% 0% -11%

P( Price AGW) 0.285714

P (MS decline) 0.714286

P (Price AGW| MS decline) 0.142857

P (Price AGW) * P (MS decline) 0.204082

Unit cost grew with increasing volume or result of company allocation system?

Production Volume (000 sf.ft.) 150 175 200 225 250 275 300 325Material 0.45 0.45 0.45 0.45 0.45 0.45 0.45 0.45Energy 0.38 0.36 0.36 0.35 0.35 0.37 0.37 0.38Labor 0.32 0.31 0.30 0.31 0.33 0.35 0.36 0.38Shipping 0.11 0.11 0.11 0.11 0.11 0.11 0.11 0.11General overhead 0.08 0.08 0.08 0.08 0.08 0.09 0.09 0.09Depreciation 0.27 0.23 0.20 0.18 0.16 0.15 0.14 0.13Manufacturing Cost 1.61 1.54 1.50 1.48 1.48 1.52 1.52 0.54Selling and admin cost 0.72 0.69 0.67 0.66 0.67 0.68 0.68 0.69Total Cost 2.33 2.23 2.17 2.14 2.15 2.20 2.20 2.23volume increase 0.17 0.14 0.13 0.11 0.10 0.09 0.08unit cost increase -0.04 -0.03 -0.01 0.00 0.02 0.00 0.01

p (volume increase) 1

p (cost increase) 0.285714

p (volume | cost) 0.285714

independence 0.285714

The ineffective cost allocation systems can leads to mistaken pricing strategy

The major ineffective cost allocation systems in Robert’s estimated cost per square foot (sqf) is treating some cost that in nature as Fixed Cost become Variable Costs. Fixed cost/sqf will decrease along with the numbers of glass produced.

Those costs are:• Shipping Cost. AGW has its own fleet, then the major cost will be depreciation (fuel is

considered as less major) and the depreciation is considered as Fixed Cost• General Overhead. Overhead in nature should be Fixed Cost instead of Variable to Labor

cost.• Selling and Admin Cost. AGW sales staffs are salaried employees instead of contractual.

So the cost will remain fixed in nature.

With the correct cost allocation system, actually AGW is in profitable situation. Based on our recalculation of sqf cost (treating these 3 costs as Variable Cost), AGW not only can reduce their price until USD 2.15 but until USD 1.76 with the production scale of 325.000 sqf. Please see our recalculation in the next spreadsheet.

Note:

We assume that the total fixed cost of each of three cost from the production level of 150,000 sqf multiplied by the original cost per unit at Robert’s initial assumption

Total Shipping Cost is USD 16.500 (0.11*150.000) Total General Overhead Cost is USD 12.000 (0.08*150.000) Total Selling and Admin Cost is USD 108.000 (0.72*150.000)

Any possibility competitor will lower their price to $ 2.15?

Any possibility competitor will lower their price to $ 2.15? (continued)

Based on our analysis on the competitors’s reaction on AGW price movements (on the table above), noted that competitors will have probability of 62.50% in order to match their price with AGW and 37.50% probability to remain with their current price.

No indication in the past experience that competitor has attitude to lower the price below AGW price. Further, AGW need not to worry if the competitor reduce their price since AGW still have room for price reduction until USD 1.76/sqf with the assumption of Break Even Point and production of 325,000 sqf

Conclusion

1. AGW Significant Loss Market Share probable due to price increase

2. Unit cost grew as result of company allocation system

3. There is possibility competitor will follow our price Reduction

4. But the benefit of lowering price will translate into better sales volume