Case Analysis: Anwar Aluminum Works

Neel K. Patel, drneelkpatel@gmail.com

BUS 512A, Dr. Kathryn Hansen
Jan. 24, 2016

Q1. What are the advantages and disadvantages of AAW accepting each customer order?
Renfrew Automotive
Advantages
 Renfrew would pay the market price
($0.95) + a spread of $0.75 / pound.
 Renfrew would pay on delivery.
 Renfrew maintains an average inventory
of 15 days.
Evers Manufacturing
Advantages
 Evers uses 10% prime aluminum and 90%
scrap aluminum, effectively reducing
costs.
 Low Fixed Cost of $2,000 for new moulds.
 Press Recovery as a part of Quality
Control Management would be 92%,
essentially reducing cost of materials.
Disadvantages
 Press Recovery as a part of Quality
Control Management would be 80%, so
for every 60,000 pounds, 15,000 pounds
extra would go to waste.
 Extra costs of $80,000 for specialty cast
moulds; and $20,000 for replacement and
maintenance annually.
Disadvantages
 Evers maintains an average inventory for
30 days, therefore, increasing cost for
holding inventory.
 Evers takes advantage of AAW’s credit
terms, basically paying within 45 days.
 Additional Labor Costs required annually.

Q2. Calculate the contribution margin rate for each product order.
 Contribution Margin (CM) = Revenue (Rev) – Variable Cost (VC)
 As a part of projected manufacturing press recovery, because of product quality control,
volume of product produced is more than volume of product sold
 Rev = Total Volume Required * Unit Price
 Renfrew Automotive:
o Unit Price = $1.7/pound ($0.95 + $0.75)
o Total Volume required = 720,000 pounds
o Therefore, Rev = $1,224,000
o Total Volume produced = 900,000
o Variable Cost depends on Cost of Materials (Prime & Scrap Aluminum at 50% each) =
[450,000 * 0.95 + 450,000 * (0.95-0.06)] => VC = $828,000
o CM = $396,000
 Evers Manufacturing:
o Unit Price = $1.55/pound ($0.95 + $0.6)
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 o Total Volume required = 800,000 pounds
o Therefore, Rev = $1,240,000
o Total Volume produced = 869565.2 pounds ~ 869,565 pounds
o Variable Cost depends on Cost of Materials (Prime Aluminum at 10% & Scrap
Aluminum at 90%) = [ 86,956.5 * 0.95 + 782,608.5 * (0.95-0.06)] =>
VC = $779,130
o CM = $460,870

Q3. Determine the return on each investment for each order based on the relevant cash flows?
 Return on Investment (ROI) = (Gain on Investment – Cost of Investment)/Cost of Investment
 Gain on Investment = Revenue
 Cost of Investment = Total Cost = Variable Cost (VC) + Fixed Cost (FC)
 Renfrew Automotive:
o Gain on Investment = $1,224,000
o FC = [$80,000 * 2/5] + ($20,000 * 2) = $72,000
o Cost of Investment = $828,000 + $72,000 = $900,000
o ROI = 0.36 = 36%
 Evers Manufacturing:
o Gain on Investment = $1,240,000
o FC = [$2,000 + (2 * 2,500)] = $7,000
o Cost of Investment = $779,130 + $7,000 = $786,130
o ROI = 0.5773 = 57.7%

Q4. Are the other considerations or calculations that should be taken into account before a final
decision is made?
 Apart from the Contribution Margin and the Return on Investment, certain other factors
have to kept in mind.
 Period of time for which finished products held in inventory, essentially Increasing
Holding Costs for AAW. The Lesser, the Better.
 As a part of Quality Control, the Projected % of Manufacturing Press Recovery,
represents cost of materials for products not sold. Considered as Extra Costs. The Lesser,
the Better.
 Payment conditions, in terms of Time taken to make the payment. The Lesser, the
Better.
 Rate of fluctuation of the Volume of Product picked up during the month. Represents
two-fold impact issues. If extra product not picked up, represents holding costs in the
inventory but at the same time, AAW has to make sure ample product is available at all
times for the customers to buy.
Q5. What is your decision and why did you come to that conclusion?

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  Based on the above calculations and keeping in mind other factors, the order from Evers
Manufacturing should be accepted.
o Higher Contribution Margin (CM), compared to that of Renfrew, represents more
profitability for AAW.
o Lower Fixed Costs (FC), compared to that of Renfrew, which can be covered
easily, beyond which AAW stands to make a higher profit.
o Higher Return on Investment (ROI), compared to that of Renfrew, indicating a
higher efficiency of the investment.
o Lower Variable Costs (VC), compared to that of Renfrew, due to less requirement
of the more expensive Prime Aluminum. Moreover, a Higher Projected
Manufacturing Press Recovery, compared to that of Renfrew, which represents
Lower Costs of unsold finished products, effectually Reducing VC even more.

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