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Written Analysis and Communication

ASSIGNMENT 1: AWC INC.: THE


VENTILATION DILEMMA

Submitted to
Dr. Gita Chaudhuri
By
Dipak Kumar Singh
Roll No. 1410120010

Gautam Budh Nagar, UP, 201314

Memo
19th, August 1991
To:

Mr. Alex MacDonald


President and Owner

From:

Dipak Kumar Singh


Executive Assistance

Subject:

Options in-front of AWC

The enclosed report contains the detailed analysis of various options available for AWC after
the recent concern raised by the Ministry of Environment for the venting of fume from the
welding line.

Summary
Situation Analysis
AWC Inc. is an aluminium fabricating company, situated in South-western Ontario. The Company
was known for its good product design, high quality, and its involvement in supporting employee's
families. Recently AWC has developed a low-priced high-quality door design which has led to
significant increase in AWCs sales. The new design requires double usage of welding line. Thus,
AWC either has to operate in second shift or buy a second welding line.
In July 1991, however, Alex MacDonald was faced with a predicament: AWCs emissions control
systems did not adhere to the regulations set by the Ministry of the Environment. In order to comply
with regulations, he needed to invest $240,000 to $400,000 in ventilation equipment. AWC had two
option in the installation of emission control system to comply with the regulation. The first one was
exhaust systems and the other was recirculating filtration system, both of them have which has huge
financial impact for the company.
Problem statement
Should AWC go for the emission control system and if yes, which one to choose among the two
system.
Options
1. Maintain the status quo, i.e, take no action
2. Adopt the exhaust system
3. Adopt the recirculating filtrations system
Criteria for evaluation (decreasing order of importance)
1. Impact on cash flow and income statement
2. Ethical issues related to the employees
3. Legal implications due to non-compliance
Evaluation of Options
Maintain the status quo, i.e, take no action
1. There is no extra financial impact, neither on the income statement, nor on the cash flow.
2. The status quo situation is not legal.
3. It is evident that Government is now more serious about environment issues in the future and if
caught AWC may receive heavy fine.
Adopting the exhaust system
1. AWC's cash flow and income statement have significant impact if they install the exhaust system as
the cost of exhaust system is $240,000 (Exhibit 1).
2. It is ethically fine as the AWC employees are concerned as they will not be exposed to toxic fumes
produced by the welding line as the exhaust system will vent the fume outside the plant.
3. The exhaust system simply vent the fumes outside the factory which will again be a legal issue .
Recirculating filtrations system
1. There is huge impact on the income statement and cash flow due to huge cost of $400,000, interest
expense and waste disposal required for recirculating filtrations system (Exhibit 2).
2. The recirculating filtrations system is ethically best
3. The recirculating filtrations system is legally sound regarding the environment regulation with an
one time investment.
Action Plan
1. Incorporate 2nd welding line to increase higher volume.
2. Look for new business opportunity in the US and advertise the new product in Canada
3. To mitigate the immediate impact on cash flow, increasing sales of the Aluminium fabrication unit.
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Situation Analysis
AWC Inc. is an aluminium fabricating company, situated in South-western Ontario, run by
the MacDonald family. Jim MacDonald founded AWC Inc. in 1950. He nurtured it to become
a successful organization with great company culture and eventually passed it down to his
son, Alex. The Company was known for its good product design, high quality, and its
involvement in supporting employee's families. AWC was committed in creating a familyoriented environment, and provided summer work for children of employees.
Due to slowdown in construction industry over the between 1989-1991 period, AWC is
facing intense competition in the industry form other competitors . The margin of AWC has
reduced to 3 percent. Upcoming free-trade agreement between U.S. and Canada would
further add to its woes owing to low cost products of U.S
Recently AWC has developed a low-priced high-quality door design which has led to
significant increase in AWCs sales. The new design requires double usage of welding line.
Thus, AWC either has to operate in second shift or buy a second welding line. To meet the
demand of the new product, AWC has to run its welding line on a full time basis, and
sometimes with second shift, with increasing sales for that product it would require for a
second welding line (cost $75000) or second shift for labors with shift premium and higher
inventory cost. It is evident that the 2nd welding line will be profitable in the long run as a
permanent solution.
In the last few years, the laws against environmentally harmful fumes inside or outside the
plant have been strengthened by the government. Along with that, the Canada-US free trade
agreement increased chances of local competition in the Canadian market but the agreement
also opens the US market for Canadian companies.
In July 1991, however, Alex MacDonald was faced with a predicament: AWCs emissions
control systems did not adhere to the regulations set by the Ministry of the Environment.
AWC did not have any emission control system currently installed to check the harmful
fumes and had received notice from the Ontario Ministry of Environment. Its present welding
line exposes the workers to potentially harmful toxic fumes resulting in serious health
hazards and according to the Government studies it is also damaging for the environment.
Recently the government has been more active than before in controlling pollution by both
legal and economic deterrents. Noncompliance with the regulation is a punishable offence
and due to recent government sensitiveness towards the issue, considerable risk is involved of
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getting caught. If caught by the government, the present noncompliance could cost AWC Inc.
$500000. At the same time , he was also aware that he could personality be fined $25,000 and
any of his employees could be fined up to $25,000 for violating the health and safety
legislation. Though the probability of being fined is only 0.002.
In order to comply with regulations, he needed to invest $240,000 to $400,000 in ventilation
equipment. However, the investment, coupled with the economic recession, would drastically
cripple the companys finances.
The industry was going through recession, which has badly impacted the AWC financially
and the aluminium fabrication industry as a whole. To uphold the firms competitive
advantage, AWC created a new door design - one that was competitive in price, assembly,
and performance. It significantly increased sales and was in high demand. It was functional
even in high-use areas, provided that the door spent more time on the welding line for a
stronger welded corner. This change created a problem. The welding line produces poisonous
fumes. When inhaled, they can have dire consequences on employee health as they have been
known to lead to respiratory damage and cancer. At the same time, there was a government
focus shift towards environmental preservation.
AWC had two option in the installation of emission control system to comply with the
regulation. The first one was exhaust systems and the other was recirculating filtration
system, both of them have which has huge financial impact for the company. The
recirculating filtration system, the more expensive of the two, satisfies with both the
environment regulations and employee health and safety regulations.
Problem statement
Should AWC go for the emission control system and if yes, which one to choose among the
two system.
Options
1. Maintain the status quo, i.e, take no action
2. Adopt the exhaust system
3. Adopt the recirculating filtrations system

Criteria for evaluation (decreasing order of importance)


1. Impact on cash flow and income statement
2. Ethical issues related to the employees
3. Legal implications due to non-compliance
Evaluation of Options
Maintain the status quo, i.e, take no action
1. There is no extra financial impact, neither on the income statement, nor on the cash flow.
2. The status quo situation is not legal. Though the AWCs present system had worked for 40
years under the leadership of Jim MacDonald but given the current situation and
governments recent stand on the environment issue, considerable risk is involved. It is not
ethical given the company policies and paternal nature of the company and the extremely
committed employee force.
3. It is evident that Government is now more serious about environment issues in the future
and if caught AWC may receive heavy fine; hence it wont be a permanent solution.
Adopting the exhaust system
1. AWC's cash flow and income statement have significant impact if they install the exhaust
system as the cost of exhaust system is $240,000 (Exhibit 1).
2. It is ethically fine as the AWC employees are concerned as they will not be exposed to
toxic fumes produced by the welding line as the exhaust system will vent the fume outside
the plant. AWC has recently introduced a superior door design and due to its quality, low
price as compared to similar products available in market, AWC is getting high volume
orders, there will be increased production related to welding line with increasing
environmental impact, hence it is not a permanent solution.
3. The exhaust system simply vent the fumes outside the factory which will again be a legal
issue and need certificate of approval from the Ministry of Environment and to get the
approval air quality impact study will be conducted in the neighbourhood. Given the
companys future growth based on the new product and with the access to the new US
market, there will be increased production related to welding line which will have greater
environmental impact, hence it is not a permanent solution for the company
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Recirculating filtrations system


1. There is huge impact on the income statement and cash flow due to huge cost of $400,000,
interest expense and waste disposal required for recirculating filtrations system (Exhibit 2).
AWC should negotiate with the banks for long term loan and look for options to see if
government subsidy is available.
2. The recirculating filtrations system is ethically best and it will create a strong image for
the AWC and its employees in the market. The family bonding with the company will
increase and will be more committed to do quality work.
3. The recirculating filtrations system is legally sound regarding the environment regulation
with an one time investment. The system will not require approval from Ministry of
Environment but system need approval of Ministry of Labour , Department of Occupational
Health and Safety . With increased production with the introduction of 2nd welding line and
increased sales, it is a permanent solution.

Recommendation
It is recommended to go for the exhaust system and install the 2nd welding line to produce
more the recently created a new door design - one that was competitive in price, assembly,
and performance and were high in demand.

Action Plan
1. Incorporate 2nd welding line to increase volume and production.
2. Look for new business opportunity in the US and advertise the new product in Canada.
3. To mitigate the immediate impact on cash flow, increasing sales of the Aluminium
fabrication unit.
Contingency Plan
1. Increase the production of new design and do sales promotion.
2. Look for options for some government support.
3. Negotiate with bank for long term loan.

Exhibit 1 Projected Income Statement 19911994 (purchase of $240,000


exhaust equipment)

Income Statement
Sales
Cost of Goods Sold
Gross Profit
Wages and
Benefits
Advertising
Utilities
Insurance
Depreciation
Travel
Trade Shows
Executive Salary
Interest Expense
Total Expenses
Earnings Before
Tax
Taxes
Net Income (Loss)
New line cost
Net Cash

New line
cost
Lifetime
Depreciati
on

Actual
1990
1991
1992
1993
1994
$3,535,118 3,623,496 3,732,201 3,844,167 3,959,492
2,386,205 2,445,860 2,556,558 2,633,254 2,712,252
1,148,913 1,177,636 1,175,643 1,210,913 1,247,240
768,000
711,936
40,000
42,860
46,700
48,500
10,000
10,000
28,945
28,945
77,000
80,000
25,000
27,000
100,000
90,000
46,200
42,540
1,141,845 1,081,781
7,068
2,333
$4,735
$4,735

95,855
2,228
$93,627
-75,000
$18,627

75,000
1991
10 Wage cut
Executive salary
7500 cut
Trade Show cut

711,936
726,175
42,860
42,860
49,015
49,100
10,000
10,000
66,445
66,445
82,700
83,400
27,000
27,000
90,000
90,000
76,140
74,403
1,156,096 1,169,383
19,547
5864.1
$13,683

41,530
12459.03
$29,071

63,715
19114.44
$44,600

$13,683

$29,071

$44,600

1992-1994
90% Wage cut
Executive
90% salary cut
100.00
% Trade Show cut
Tax

740,698
42,860
49,700
10,000
66,445
84,400
27,000
90,000
72,422
1,183,525

90%
90%
100.00%
30%

Exhibit 2 Projected Income Statement 19911994 (purchase of $400,000 air


recirculation equipment)
Actual
Income Statement
1990
1991
1992
1993
1994
3,623,49
3,732,20
3,959,49
Sales
$3,535,118
6
1 3,844,167
2
2,445,86
2,556,55
2,712,25
Cost of Goods Sold
2,386,205
0
8 2,633,254
2
1,177,63
1,175,64
1,247,24
Gross Profit
1,148,913
6
3 1,210,913
0
Wages and
Benefits
768,000
711,936
672,384
685,832
699,548
Advertising
40,000
42,860
42,860
42,860
42,860
Utilities
46,700
48,500
49,015
49,100
49,700
Insurance
10,000
10,000
10,000
10,000
10,000
Depreciation
28,945
28,945
88,320
88,320
88,320
Travel
77,000
80,000
82,700
83,400
84,400
Trade Shows
25,000
27,000
27,000
27,000
27,000
Executive Salary
100,000
90,000
85,000
85,000
85,000
waste disposal

8,400
8,400
8,400
Interest Expense
46,200
42,540
98,540
95,642
92,338
1,081,78
1,164,21
1,187,56
Total Expenses
1,141,845
1
9 1,175,554
6
Earnings Before
Tax
7,068
95,855
11,424
35,359
59,674
Taxes
2,333
2,228
3427.2 10607.745 17902.11
Net Income (Loss)
$4,735
$93,627
$7,997
$24,751
$41,772
New line cost
-75,000
Net Cash
$4,735
$18,627
$7,997
$24,751
$41,772

New line
cost
Lifetime
Depreciatio
n

75,000
1991
8 Wage cut
Executive salary
9375 cut
Trade Show cut

Benefit cut
%

1992-1994
90% Wage cut
Executive salary
90% cut
100.00
% Trade Show cut

85%
85%
100.00%

10%
Tax

30%