You are on page 1of 12

WRITTEN ANALYSIS AND COMMUNICATION 2

ASSIGNMENT 1: CASE ANALYSIS

AWC Inc.: The Ventilation Dilemma

A Report Submitted to:


Prof. Vidya Jindal

SUBMITTED BY:
Mahima Khandelwal
PGP-1
Date: 05-10-2014

Letter of Transmittal
Date: 01-Aug-1991
To:
Mr. Alex Macdonald
President
AWC Inc.
Ontario, Canada

From:
Mahima Khandelwal
Associate Consultant
ABC Company Limited
Vaughan, Canada

Subject: Recommendation on the future course of action for AWC Inc.

Dear Sir,

Please find attached the recommendation and action plan for AWC Inc.
The report contains complete analysis of the current situation and recommends the action plan
that best suits the interest of the firm.

Thanks and Regards,


Mahima Khandelwal
Associate Consultant

Executive Summary:
AWC Inc. is a Southwestern Ontario based aluminum fabrication plant that specializes in the
manufacture of commercial doors, windows, curtain wall products and store fronts. Since its
foundation it is well known for its quality, product design as well as competitive prices. Because
of increased competition in the market AWC has come up with a superior door design for
general use that led to significant increase in its sales. AWC is now facing the dilemma of
whether to install emission control system in its plant to be in compliance with the government
regulations or should it continue in the way it had been operating since it was founded in 1950.
Problem Statement:
What steps should be taken by AWC Inc. about the emission control system in its plant?
Options:

AWC should accept the existing situation and avoid purchase of any ventilation
equipment.
AWC should install an exhaust system.
AWC should install a recirculating filtration system.

Evaluation Criteria:

Profit and Financial Sustainability


Legal Issues
Organization Culture and Social Responsibility

Evaluation:

The firm should install the exhaust system as it is the most viable in terms of financial
stability as well as legal compliance. Also it is in-line with the organization culture.

Recommendation:
It is recommended that AWC should install the exhaust system in its plant to release the fumes
into the atmosphere after taking approval from the Ministry of Environment.
Action Plan:
AWC should install the exhaust system and then reduce the salaries of its employees which
would further increase its profits compared to the previous year. They could then increase the
salaries the year after, so that the employees are also not dissatisfied.

Situational Analysis:
AWC Inc. is a small aluminum fabrication plant based in Southwestern Ontario. It was founded
in 1950 by Jim MacDonald. Currently it is run by Jims son Alex MacDonald, who is the current
owner and President of AWC Inc. Since its foundation, the company is well known for the
quality, design as well as the competitive price of its products. It specializes in the production of
commercial doors, windows, storefronts and curtain wall products. AWC is more than a
workplace for its employees as it was kind of a family. As a result the employees were very
much motivated and performance of the firm was boosted.
The aluminum fabrication industry had low entry barriers and also aluminum was suitable was a
variety of applications. AWC purchased various alloys of aluminum and then machined and
assembled them to form different products. Because of the easy entry, there were several
competitors and AWC had 37 competitors in southwestern Ontario. The competitive bidding
process ensured that contracts were awarded through bidding process. To ensure that products
were at par with the requirements of the customer, the engineers worked closely with the
customers.
The company had a total of 100 employees which together constituted the production workers
and the office staff. The office staff consisted of 25 engineers who worked right from the
proposal stage to the final installation. AWCs competent engineers along with committed and
skilled production workers ensured that its products were best in terms of performance in the
market. Also, because of the increased number of competitors and the recession in the
construction industry, the profits on contracts were cut down to 3% from the earlier 5-7%. Also,
the custom contracts which were more time consuming as compared to standard contracts
ensured up to 20% profits.
The recent shake out in the aluminum fabrication industry has led AWC to cut down its profits,
prices and at the same time improving its efficiency. This had led to around 33% of AWCs
competitors going out of business and also others who have merged together to spread the costs
over a larger volume. Apart from this, the Canada-U.S Free Trade Agreement further increased
the competition in the aluminum fabrication industry by offering products at lower prices
because of lower cost structures.
3

AWC has recently introduced a superior door design which boosted companys sales of
aluminum doors thereby increasing the need for more production. This new door provided
superior performance and had an upper edge over others in terms of price and ease of assembly
and required stronger welding and hence more time in the production process (on welding line).
This in turn generated the need for welding line to be either used full time or on a dual shift
basis. If used on a dual shift basis, it would incur more cost and also the difficulty to find a new
supervisor. On the other hand, if a second welding line was introduced we could save on some of
the expenses like shift premium, but at the same time the equipment would cost around $75000.
There were certain emission control systems that had to be followed as per government
regulations failing which would attract penalties. There were two kinds of emission control
systems available:
1. Exhaust system - This would let the fumes outside the plant and was the cheaper of the
two options. This would cost Alex approximately $240,000.This method led to the
release of by products outside the plant into the atmosphere and hence required
Certificate of Approval from the Ministry of Environment.
2. Recirculating Filtration system- This was a little more expensive and would incur a fixed
cost of approximately $450000. It would run the air from the welding station through
electrostatic filters and then release it back to the plant. This required an approval from
the Ministry of Labour, Department of Occupational Health and Safety. Also, the filters
that were used had to be cleaned regularly for effective functioning and required trained
employees. This process generated some toxic material that had to be properly disposed
following the waste disposal regulations.
Problem Statement:
What steps should be taken by AWC Inc. about the emission control system in its plant?
Options:
1. AWC should accept the existing situation and avoid purchase of any ventilation
equipment.
2. AWC should install an exhaust system.
3. AWC should install a recirculating filtration system.
4

Evaluation Criteria:
1. Profit and Financial Sustainability
2. Legal Issues
3. Organization Culture and Social Responsibility
Evaluation:
Option 1: AWC should accept the existing situation and avoid purchase of any ventilation
equipment

Profit and Financial Sustainability


With no ventilation system in place the profits of the company would reduce in 1992 as
compared to 1991 but it then again increases in the subsequent years.

Legal Issues
This would lead to violation of some of the government rules regarding emission and
could lead to penalties of around $400,000 being imposed. Although in the past such
small plants have not been penalized for the same.

Organization Culture and Social Responsibility


According to the government representatives, prolonged exposure to these gases may
lead to serious respiratory problems and cancer in the long term. Hence the social
responsibility is being neglected.

Option 2: AWC should install an exhaust system

Profit and Financial Sustainability


Installing an exhaust system would incur a cost of approximately $240,000 to AWC, as a
result of which the company will have to bear heavy losses. Hence they need to reduce
the salaries of the employees in order to minimize their losses. Also Alex should cut
down his salary as well to bring down the losses to acceptable levels. (Refer Exhibit 1)

Legal Issues
The exhaust system would lead to movement of the exhaust gases from inside the plant to
the outside environment. This would require a certificate of approval from the Ministry of

Environment which were concerned with external emissions of by-products which


included a studied the impact on air quality for AWCs neighbours.

Organization Culture and Social Responsibility


Since AWC has been into operation from past 41 years, and had been providing honest
work to local community hence it is nicely following its social responsibility.

Option 3: AWC should install a recirculating filtration system

Profit and Financial Sustainability


The purchase of air circulation system would lead to very high losses for the company
and hence is not a viable option as even if we try and reduce the salaries of the
employees, we will not be able to come to a break-even point for the firm to operate.
Also, removal of the sludge produced will lead to additional increase in the costs for the
company. (Refer Exhibit 3)

Legal Issues
This would lead the company to produce hazardous sludge which requires safety
precautions and could not be legally stored at its site. To comply with this requirement he
would have to invest an additional $500 for its disposal and $ 200 on its testing as well.

Organization Culture and Social Responsibility


Since the company is investing huge amount of money to follow all the government
regulations concerning emissions hence it is fulfilling its social responsibility.

Recommendation:
It is recommended that AWC should install the exhaust system in its plant after taking approval
from the Ministry of Environment as it fulfills all the evaluation criteria.

Action Plan:
AWC should install the exhaust system and then reduce the salaries of its employees by
approximately 7% and Alexs salary should be reduced by around 12% (Refer Exhibit 2) as this
6

would increase its profits compared to the previous year. They should convince the employees
regarding the decrease in salaries and ensure that it would be brought back to normal as the
company recovers. Since the employees are emotionally attached to AWC and consider it as a
family, they would surely agree to the request made by Alex and would lead to future growth.

Exhibit 1:
Projected Income Statement
(Purchase of $240,000 exhaust equipment)
Actual
1990
Amount ($)

1991
Amount ($)

Exhaust system
1992
Amount ($)

1993
Amount ($)

Sales

3,535,118.00

3,623,496.00

3,732,201.00

3,844,167.00

Cost of Goods Sold

2,386,205.00

2,445,860.00

2,556,558.00

2,633,254.00

Gross Profit

1,148,913.00

1,177,636.00

1,175,643.00

1,210,913.00

Wages and
Benefits

768,000.00

791,040.00

675,840.00

714,240.00

Advertising

40,000.00

42,860.00

42,860.00

42,860.00

Utilities

46,700.00

48,500.00

49,015.00

49,100.00

Insurance

10,000.00

10,000.00

10,000.00

10,000.00

Depreciation

28,945.00

28,945.00

58,945.00

58,945.00

Travel

77,000.00

80,000.00

82,700.00

83,400.00

Trade Shows

25,000.00

27,000.00

27,000.00

27,000.00

Executive Salary

100,000.00

100,000.00

88,000.00

88,000.00

Interest Expense

46,200.00

42,540.00

76,140.00

74,403.00

Total Expenses

1,141,845.00

1,170,885.00

1,110,500.00

Earnings Before
Tax

7,068.00

6,751.00

65,143.00

62,965.00

Taxes

2,333.00

2,228.36

21,502.35

20,783.44

Net Income

4,735.00

4,522.64

43,640.65

42,181.56

1,147,948.00

Assumptions:
1. Number of employees remains constant at 100.
2. Salaries of employees are reduced by 7% in 1992.
3. Alex MacDonald salary is reduced by 12% in 1992.
4. Equipment has been purchased on loan and hence interest expense is applicable.
5. Salaries are again increased by 7% in 1993.

Exhibit 2:
No. of employees
Average Salary
Reduction
New Average Salary
New total wages

100
7,680.00
7%
7142.40
714240

Exhibit 3:
Projected Income Statement
(Purchase of $400,000 air recirculation equipment)
Actual
1990
Amount ($)

1991
Amount ($)

Recirculation System
1992
Amount ($)

1993
Amount ($)

Sales

3,535,118.00

3,623,496.00

3,732,201.00

3,844,167.00

Cost of Goods Sold

2,386,205.00

2,445,860.00

2,556,558.00

2,633,254.00

Gross Profit

1,148,913.00

1,177,636.00

1,175,643.00

1,210,913.00

Wages and Benefits

768,000.00

791,040.00

691,200.00

729,600.00

Advertising

40,000.00

42,860.00

42,860.00

42,860.00

Utilities

46,700.00

48,500.00

49,015.00

49,100.00

Insurance

10,000.00

10,000.00

10,000.00

10,000.00

Depreciation

28,945.00

28,945.00

78,945.00

78,945.00

Travel

77,000.00

80,000.00

82,700.00

83,400.00

Trade Shows

25,000.00

27,000.00

27,000.00

27,000.00

Executive Salary

100,000.00

100,000.00

88,000.00

88,000.00

8,400.00

8,400.00

Waste Disposal

Interest Expense

46,200.00

42,540.00

76,140.00

74,403.00

Total Expenses

1,141,845.00

1,170,885.00

1,154,260.00

1,191,708.00

Earnings Before
Tax

7,068.00

6,751.00

21,383.00

19,205.00

Taxes

2,333.00

2,228.36

7,058.08

6,339.17

Net Income

4,735.00

4,522.64

14,324.92

12,865.83
10

Assumptions:
1. Number of employees remains constant at 100.
2. Salaries of employees are reduced by 7% in 1992.
3. Alex MacDonald salary is reduced by 12% in 1992.
4. Equipment has been purchased on loan and hence interest expense is applicable.
5. Salaries are again increased by 7% in 1993.

11

You might also like