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AD-I-032

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Vesta Corporation

Guía para trabajo en equipo

La tarea de su grupo de estudio consistirá en presentar en sesión una oferta para cada
uno de los diez trabajos del Anexo 3 del caso.

El grupo de estudio debe trabajar junto, pero independientemente de los otros grupos, y no deberá
haber ningún tipo de intercambio ni de consultas entre los grupos. Naturalmente, no se permiten
acuerdos de ofertas en ningún sentido.

La oferta de cada artículo debe ser hecha en términos de dólares por juego, redondeada
a centavos (del estilo de $0,56 o $1,23 o $2,87). Durante la sesión, las ofertas, una cada
vez, serán públicamente comparadas con las ofertas de los demás grupos de estudio;
después, el profesor dará el tiempo real de ciclo del trabajo, con lo que podrán calcular
las utilidades (o pérdidas) de cada trabajo.

Estas utilidades (o pérdidas) se multiplicarán por el número de grupos que hayan


presentado una oferta superior a la de ustedes. Por ejemplo, si son siete grupos de
estudio, y cuatro presentan ofertas más altas y dos ofertas más bajas, sus utilidades (o
pérdidas) se les asignarán cuatro veces. En el caso de que su oferta sea la superior no se
les asignará ninguna utilidad (se multiplica por cero). La ganancia (o pérdida) definitiva
será la suma del resultado de los diez trabajos.

Para facilitar el cálculo de las utilidades (o pérdidas) de cada trabajo, se incluye a


continuación un ejemplo ilustrativo.

1
AD-I-032

Ejemplo ilustrativo
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Los costos para el trabajo número 7, (Large cont.), son:

Costo material:

Costo de la libra, por densidad, por volumen, por tamaño de la orden.

Costo material = 0,75 (1,5) (0.868) (60) = $58,59

Costo inspección y empaque:

Costo promedio por inspección y empaque por pie cúbico de material, por volumen,
por tamaño de la orden.

Costo inspección y empaque = 0.185 (0.868) (60) = $9,3648

Costo de fabricación por cada segundo de ciclo:

Costo por hora sobre 3600, (para llevar a segundos), por 1 sobre partes por molde, por
tamaño de orden.

Costo de fabricación por cada segundo de ciclo = (35/3600) (1/2) (60) = $0,29167

Supongamos que pensamos que el tiempo para el ciclo del trabajo es de 100 segundos.1

Los costos de fabricación para este trabajo serían entonces = (0,29167) (100) = $29,16667

Los costos totales serían = (58,59) + (9,3648) + (29,16667) = $97,3915

La oferta que tendría cero utilidades en este caso hipotético sería = (97,3915) / (60) =
$1,6232, que, redondeando a centavos, sería $1,62.

1
Se utiliza el tiempo de 100 segundos para facilitar las multiplicaciones y por tanto no se debe hacer
ninguna inferencia sobre el tiempo real del ciclo.

2
UVA-QA-0516
Rev. Mar. 27, 2013
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VESTA CORPORATION

The gloomy sky as he drove home from his office reminded Wilbur Warner of his
problem. Recently promoted to vice president of sales for VESTA Corporation, he was
responsible for securing contracts that were awarded on a bid basis. In the past, a simple method
of estimating costs had been sufficient to guarantee a satisfactory return on all items his company
produced under contract, but recently improper pricing of his company’s products had been
having a serious effect on profitability. A more accurate method for estimating production costs
was quickly becoming essential for competitive and profitable pricing.

Background

VESTA produced expanded polystyrene (EPS) shapes for a wide variety of customers.
Expanded polystyrene was a moldable plastic material first commercialized in the mid-l950s. In
its raw form, beads of EPS resembled small grains of white sand. When subjected to high-
pressure steam, the beads expanded up to 50 times their original size and fused together. The
expansion and fusion was conducted in specially made molds or “steam chests.”

Depending on the size, shape, and construction of the mold cavities, almost any desired
form could be molded. Most items were custom-formed for a specific purpose, such as protective
packaging, point-of-purchase displays, material-handling trays, construction uses, and novelty
items. Because of its strength, resiliency, insulating abilities, shock absorption, and light weight,
the material had virtually unlimited applications.

Although other types of moldable foams were available, articles molded with expanded
polystyrene dominated the moldable foam industry. Not only were production costs lower than
with other moldable foams, but EPS’s long presence in the market and proven characteristics
made it the material of choice for most applications. Proprietary, protective packaging of high-
value goods (televisions, computers, etc.) had emerged as the leading use of EPS.

This case was prepared by Philip E. Pfeifer, Richard S. Reynolds Professor of Business Administration. It is a
modified version of “Vesta Corporation” (UVA-QA-0366), written by Michael J. Balock. Some elements have been
disguised. Copyright  1997 by the University of Virginia Darden School Foundation, Charlottesville, VA. All
rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. 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 the Darden
School Foundation.
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Competition to produce EPS packaging materials was intense, especially for high-volume
orders from large, established customers. Manufacturers of electronic equipment sometimes
ordered as many as two million pieces at a time, and they solicited bids from several EPS
producers. On the other hand, a lower volume order from a new or smaller customer would carry
a higher price per unit. Pricing for these customers was still competitive, however, as EPS
molders tried to use excess capacity or expand their customer base.

Completed items were shipped to the customer from the producer FOB,1 which removed
consideration of transportation efficiencies from cost and pricing decisions. Furthermore,
because expensive molds were supplied by the customer, entry into the molding business was
relatively easy. All one needed was space, steam-generating equipment, and the machinery to
inject EPS beads and steam into the molds.

VESTA Corporation

Wilbur Warner knew that his company had an excellent reputation in the business, and he
had successfully introduced several customers to the advantages of using EPS items. Usually
VESTA worked closely with a potential customer to design an item, develop a workable
prototype, and establish proper specifications for production. A mold would then be made for the
specific item at VESTA’s foundry and machine-tool facility. Developmental costs were included
in the costs of the mold, which ran between $3,000 and $50,000, depending on the complexity of
the item.

If VESTA produced a mold for a customer, the company would often be awarded a small
initial production contract to ensure that the mold worked properly and the resulting item met
expectations. The customer was then free to take the mold to the lowest priced producer for the
bulk of the intended production volume.

A high-volume production run kept downtime at a minimum and reduced mold


changeover costs, so VESTA was anxious to keep its production facilities at full capacity. Utility
costs associated with steam generation, heating, and cooling were generally fixed whenever the
plant was producing; thus keeping all machines running was advantageous. The typical plant had
l0 to 20 machines for injecting beads, steam, water, and air into an EPS mold. Each machine was
capable of serving one mold. The molds were all about the size of a large desk and contained
from l to l6 cavities, depending on the dimensions of the parts to be molded. Thus, 1 very large
part or up to l6 small parts would be produced from each cycle of a single machine and mold.

During a molding cycle, beads would be blown into mold cavities with compressed air.
The amount of beads to be injected depended on the desired density of an item. More or fewer
beads in a cavity would expand to identical volumes, but more beads would result in a higher-
density item. Therefore, the time required to blow the beads into the mold depended, in part, on

1
With FOB (an initialism standing for “free on board” or “freight on board”) pricing, the customer assumed
responsibility for transporting the product from the plant to the customer.
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the desired density of the item. The time required to blow the beads into the mold also depended
on the size and shape of the cavities. Generally, the more cavities a mold had (the more parts
produced per mold in each cycle), the longer it would take to fill the mold.

After beads were blown into the cavities, steam would be injected until the beads fully
expanded and fused together. A higher-density item required more steam than a lower-density
item. To prevent continued expansion when the mold was split, water or air was circulated
through the mold to cool it. The molded items were then ejected from the mold onto a conveyor
belt for inspection and packaging. The entire cycle (blowing the beads into the cavities of the
mold, injecting steam, and cooling) took anywhere from 30 to 300 seconds. The time for one
molding machine to complete one cycle was called the cycle time. The number of cavities per
mold determined the number of parts produced from each machine each cycle.

Cost Estimation

Total production costs historically were estimated at two times material cost. Each part to
be molded had a known volume and target density, so it was easy to calculate how much bead
material would be used in the process. For example, a part with a volume of 0.85 cubic feet and a
density of l.5 pounds per cubic foot would require 1.275 pounds of material. Because EPS beads
cost $0.75 per pound, the material cost of this part would be $0.9563 per unit. Total production
cost would be estimated at twice this amount, or $l.9l25 per part. After adding a 25% profit, the
item would be bid at $2.39 per part.

As a former plant manager, Warner was well aware of the problems faced at the
manufacturing level. Machinery breakdowns, improper cycling parameters, and broken molded
products plagued the molding process. A production run often took more time than expected to
complete. Faster-than-expected production runs were experienced as well. Usually, the two
extremes canceled one another. Recently, however, an alarming number of jobs at VESTA had
been running longer than had been anticipated when they were bid, which resulted in losses for
the company.

Warner knew that the material costs of a part could be calculated easily using the $0.75-
per-pound cost of EPS beads. For the most part, inspection and packaging costs were
proportional to the volume of EPS inspected and packaged. With only minor variations from job
to job, inspection/packaging costs amounted to $0.185 per cubic foot of EPS material. Finally,
use of the machines carried a full direct cost of $35 per hour per machine. Warner also
remembered that, because of shift changes and maintenance, a machine could be used only 22
hours per day. With an estimate of cycle time, therefore, he should be able to estimate machine
cost. Adding machine costs to material and inspection/packaging costs would give total costs.
With an accurate prediction of cycle times, Warner thought this new method of estimating total
cost would be better than using the two-times-material-cost rule.
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After several phone calls to plant managers, he obtained information relating to cycle
times. Because Warner wanted to check cycle relationships using a simply shaped item before
looking at the complex shapes normally produced, one manager conducted a special experiment
molding simple rectangular insulation board. To collect a range of data, the board was molded at
various thicknesses, densities, and number of cavities (parts) per mold. The resulting cycle times
are shown in Exhibit l.

For the complex shapes associated with protective packaging, conventional wisdom
among Warner’s managers was that cycle time depended on the maximum thickness of an item
and the target density of the item. The maximum thickness of the parts being molded represented
something of a “bottleneck” in the injection process and thus helped determine the time it took to
complete a cycle. The managers also believed that part volume did not affect cycle time directly.
The managers recognized that part volume affected the number of parts per mold (the smaller the
part, the more parts were designed to be made from a single mold) and that cycle time did
increase with the number of parts per mold. But the managers believed there was no direct effect
of part volume on cycle time.

For the insulation board experiments changing thickness and density (see Exhibit 1), one
large piece of rectangular insulation board was molded at a time, in a one-cavity mold. For the
experiments changing the number of parts per mold, increasing the number of cavities (parts) per
mold was accomplished by decreasing the volume of each part being molded. As the number of
cavities (parts) in a mold increased, the cycle time increased as a result of problems with feeding
the bead, air, and steam uniformly into multiple cavities.

With the help of the plant managers, Warner was also able to compile cycle-time
information concerning recent production of several different items. These items represented
typical shapes, both complex and simple, that VESTA produced on a regular basis. Information
was obtained for each item that identified part volume, maximum thickness, part density, and
number of parts (cavities) per mold. From his own records, he was able to match the average
cycle-time data with the actual bid prices on each production job. All the information he had
about recent production data is shown in Exhibit 2.

Between the two groups of data, he hoped to find a way to predict average cycle times. If
he could predict the cycle time for an item, he could use it to estimate total cost and determine a
bid. Another benefit of predicting cycle times would be an accurate estimate of the length of a
production run for scheduling purposes.

Warner was anxious to try any models that resulted from his analysis on several pending
bid proposals. He had gathered the data shown in Exhibit 3 on jobs that VESTA wished to bid
on in the next few weeks. In all these situations, the customer would supply the molds. If his
model could show a more accurate reflection of true costs than was currently possible, VESTA
would be in a much better position to submit winning and profitable bids.
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Exhibit l
VESTA CORPORATION
Experimental Cycle-Time Data for Insulation Board

Actual Cycle Thickness Number of Parts


Item Description Time Density (lb./cu. ft.)
(inches) per Mold
(seconds)
Insulation Board 30 0.500 1.00 1
Changing Thickness 45 0.750 1.00 1
55 1.000 1.00 1
60 1.250 1.00 1
65 1.500 1.00 1
100 2.000 1.00 1

Changing Density 50 1.000 0.90 1


55 1.000 1.00 1
55 1.000 1.10 1
60 1.000 1.25 1
65 1.000 1.40 1
65 1.000 1.50 1
80 1.000 1.75 1
100 1.000 2.00 1

Changing Number of Parts 55 1.000 1.00 1


per Mold 55 1.000 1.00 2
60 1.000 1.00 4
60 1.000 1.00 6
65 1.000 1.00 8
70 1.000 1.00 10
70 1.000 1.00 12

Source: Created by case writer.


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Exhibit 2
VESTA CORPORATION
Recent Production Data

Actual
Maximum Number of
Cycle Part Volume Target Density Bid Price
Item Description Thickness Parts per
Time (cu. ft.) (lb./cu. ft.) per Part
(inches) Mold
(seconds)
Camera Packaging #1 60 0.121 0.750 1.10 8 $0.2500
Camera Packaging #2 70 0.075 0.875 1.15 10 $0.1630
Computer Packaging #1 105 0.567 1.750 1.40 2 $1.5000
Computer Packaging #2 115 0.673 2.125 1.50 2 $1.9875
Printer Packaging 90 0.310 1.375 1.25 4 $0.7935
TV Packaging #1 130 0.251 1.875 1.40 5 $0.6530
TV Packaging #2 70 0.240 1.250 1.15 4 $0.5575
TV Packaging #3 110 0.500 1.500 1.65 2 $1.5000
Radio Packaging #1 65 0.148 1.000 1.10 6 $0.3000
Radio Packaging #2 95 0.142 1.250 1.10 8 $0.3475
Radio Packaging #3 55 0.160 0.875 1.25 7 $0.4525
Toy Packaging 90 0.175 1.500 0.95 10 $0.3740
Toy Item #1 220 0.650 5.000 1.20 5 $1.8750
Toy Item #2 45 0.035 0.750 1.00 12 $0.1000
Toy Item #3 50 0.067 1.000 0.90 12 $0.1500
Toy Item #4 180 0.194 2.750 2.00 7 $0.7000
Parts Handling Tray #1 120 1.542 2.500 1.50 1 $3.8981
Parts Handling Tray #2 130 0.479 1.750 1.65 2 $1.3700
Purchase Display #l 160 1.485 3.000 1.75 1 $5.0000
Purchase Display #2 150 0.400 2.250 1.45 3 $1.2500
Purchase Display #3 145 0.635 2.500 1.60 2 $2.0000
EPS Block #1 165 0.250 3.000 1.25 8 $0.5000
EPS Block #2 240 0.750 5.000 1.25 4 $1.5000
Insulation Board 55 2.670 1.000 1.00 1 $0.4000
Source: Created by case writer.
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Exhibit 3
VESTA CORPORATION
Potential Production Jobs to be Bid

Maximum
Part Volume Target Density Parts per Order Size
Item Description Thickness
(cu. ft.) (lb./cu. ft.) Mold (1,000 parts)
(inches)
1. TV Pack #1 0.203 1.375 1.20 8 340
2. Laser Printer 0.521 1.000 1.40 4 960
3. Car Phone 0.102 1.000 1.20 4 180
4. Copier 0.116 2.250 1.75 16 1,920
5. Pistol Pack 0.289 0.750 1.50 4 20
6. TV Pack #2 0.253 1.500 1.15 8 400
7. Large Cont. 0.868 1.500 1.50 2 60
8. Med. Cont. 0.434 1.500 1.50 4 50
9. Small Cont. 0.289 1.500 1.50 4 30
10. Gift Pack 0.130 1.000 1.75 8 200
Source: Created by case writer.

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