Curled Metal Inc./Adam 1 and Co.

/Section 13

Decision: Curved Metal Incorporated should price the new 11.5-inch CMI cushion pad at $267.00 and
market only to existing distributors of construction equipment in order to share business risk while
offering them a fair profit margin. CMI should produce only 250 cushion pads per month by utilizing
existing capacity, and delay the acquisition of the specialized tooling machine and advertising expenses
until a future period when accurate demand forecasts become available. As CMI will be using existing
capacity, overhead should be allocated at a fixed rate. The success of CMIs new cushion pad requires a
controlled entrance into the market therefore aggressive expansion must be avoided in the short-term.

Evidence: Pricing the new 11.5-inch CMI cushion pad at $267.00 serves two purposes. It allows CMI to
realize the required 50% contribution margin on the sale of each cushion pad, and it allows CMIs
distribution partners to realize a 50% profit margin. While the ultimate selling price (assuming
distributors sell at a price of $534 per pad or $3200 per set of six) is considerably higher than the average
$10 charge per conventional pad, the cost savings to ultimate customers is $2,275.20 per pad or
$13,651.20 per set over conventional pads (assuming a 300-pile job).
Delaying the purchase of the specialized tooling machine until a later date when demand is more
determinable avoids costly depreciation expense of $15,000 per year (assuming a conservative 10 year
economic life) related to the tooling machine while the cost savings realized on direct labor ($52.20) and
overhead ($185.33) totals only $237.53. This small amount of savings does not justify the acquisition of
an asset that requires such a large yearly cost allocation. By delaying acquisition of additional capacity,
CMI does expose itself to the risk of not being able to meet demand should it rise rapidly. The risk of
purchasing excess capacity without the requisite demand, however, is a far larger risk therefore delaying
the purchase of additional capacity is the best course of action. By using existing idle capacity for the
manufacture of the new pads, allocating fixed costs on a variable rate is not appropriate and results in
over-costing, thus overhead should be fixed. Additionally as a result of existing capacity utilization, CMI
assumes substantially lower risk associated with the ability to sell these new pads since fixed costs are not
relevant and the company will only have to commit itself to the cost of direct materials and labor. The
same reasoning applies to advertising expenses. CMI should not commit itself to advertising expenses
until demand is more predictable.

Action Plan: In one week, CMI, in order to satisfy the existing demand for cushions from Kendrick
Company, will accept a one-time special order, priced at $267.00 per pad. Further sales shall be
conducted through construction-oriented manufacturers representatives, who will market CMIs new
cushion pad to existing distributors and supply houses. To select proper distribution outlets, CMI will
need to select distribution partners that will offer the most exposure to ultimate customers. For example,
distribution partners could be selected on the criterion that a majority of their revenue comes from piling
equipment rental and sales.
Based on the outcome of Dr. McCormacks research and initial sales by key distributors, CMI can
begin to create preliminary demand forecasts for its new cushion pads in the near term. Depending on the
level of demand, purchases of specialized tooling machines and additional capacity can be made as
appropriate. The primary risk associated with bringing the new pads to market will be the inability to sell
the new pads to distributors or the inability of distributors to sell the pads to ultimate customers. CMIs
exposure to this risk is minimized from the outset because the company can ultimately walk way from the
new pads with minimal capital loses.
In the long term, after demand can be predicted with reasonable accuracy, CMI should begin to
target existing and potential distributors with advertizing that emphasizes the effectiveness and enhanced
safety of the new pads. Potential effective advertising venues include trade magazines and informational
displays at the Amalgamated Pile and Fitting Corporation Piletalk seminars.