Insteel Wire ProductsActivity Based Management at Andrews

Group 11: Bale, Krishna, Lugun, Nag, Sen

Background – IWP

- Product Range - Industrial wires, Bulk nails, Collated fasteners, Agricultural fencing

- Primary markets - Construction, Home Furnishing, Appliance & Agricultural Industries

- Annual sales revenues - $300 million

- Andrew’s - 4 product lines, 477 products- Pareto Principle applies

Background – Andrew’s

Why ABC?- Numerous Products – Commodity & Made to Order- Intense Profit Pressures- Helps measure customer profitability

- Galvanized wire, mesh products - losing money- Small wire customers - more profitable - Nail business most profitable

Major Findings

Total Cost Information Galvanized Pallet Nails

1995-96 1996-97

Sales($M) 1.95 2.10

Sales in Tons 2600 2817

Material Costs ($M) 0.90 1.10

Conversion Costs ($M) 0.859 1.271

Net Profits ($M) 0.191 (0.271)

- Third Cell for Galvanized Pallet Nails

- Additional Costs Labour : $200,000 Dep of Threading/Heading Machine : $90,000 EVA of Threading/Heading Machine : $145,800

Corrected CalculationsDelayed Operation 1995-96 1996-97

Sales($M) 1.95 2.10

Sales in Tons 2600 2817

Material Costs ($M) 0.90 1.10

Conversion Costs ($M) 0.859 0.835

Net Profits ($M) 0.191 0.165

Reconciliation 1996-97

Labour ($) 2,00,000

Dep H/T ($) 90,000

EVA H/T ($) 1,45,800Cost of Excess Capacity ($)

4,35,800

Corrected CalculationsTimely Operation 1995-96 1996-97

Sales($M) 1.95 3.15

Sales in Tons 2600 4226

Material Costs ($M) 0.90 1.65

Conversion Costs ($M) 0.859 1.41

Net Profits ($M) 0.191 0.091

Timely Operation - 2 1995-96 1996-97

Sales($M) 1.95 2.39

Sales in Tons 2600 3200

Material Costs ($M) 0.90 1.25

Conversion Costs ($M) 0.859 1.31

Net Profits ($M) 0.191 (0.173)

Conclusion

“ Although the addition of third cell seems to lower profitability, the major costs – Depreciation & EVA

will reduce in the long term, & with sufficient demand the profitability will pick up. Hence in hindsight the decision to add the third cell was

justified ”

Thanks

Microsoft Office Excel Worksheet