UV1283

Rev. Feb. 24, 2014

TONA FOUNDRY

Negotiation Background

Evan Chung, sales manager for TONA Foundry, had a lot on his mind. DOSA Motor
Manufacturing had been purchasing cast-aluminum motor housings from two suppliers, Byrne
Industries and TONA Foundry. For one of its motors, the M103, DOSA had awarded the left half
of the housing to Byrne and the right half to TONA. These parts were identical in terms of material
type and weight, but they could not be cast from the same die cavity because of a slight difference
in shape.

Fiona Stadtler, DOSA’s metals buyer, had recently asked Chung to bid on the housing for
M103’s replacement, the M104. TONA would be given the opportunity to make both the left and
the right halves, if the price was right. Stadtler sent Chung the new part’s specifications, and she
planned to meet with him soon to discuss price.

Stadtler was clearly expecting a price decrease. She had pointed out to Chung that the new
part was 10% lighter and specifically designed to be easier to cast. Stadtler also expected a decrease
in material cost and cycle time owing to the reduced weight, as well as less wasted material because
of the improved design. She was correct about the material and cycle time; however, the new part
was unlikely to have a higher yield.

Chung was still frustrated with the design of DOSA’s castings. He believed that his
engineers could easily take an additional 5% off the part’s cost if they redesigned it. In addition,
the better-designed part could completely eliminate the need to machine the casting to a final form
in DOSA’s plant. From his visits to DOSA’s plant, Chung believed that DOSA currently incurred
a cost of at least $0.50 apiece in its in-house machining operations for the part.

When TONA was awarded the M103 contract a few years earlier, the M103 housing was
not a particularly profitable part. But since then, TONA successfully cut costs by making several
process improvements:

This case was prepared by Timothy M. Laseter, Visiting Assistant Professor, Darden School of Business, with the
help of Silas Byrne (MBA ’98) and Dorian Swerdlow. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright  2008 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.

This document is authorized for use only by Farid Alfonso Pool Estrada (LUXOR._.SETH@HOTMAIL.COM). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
 -2- UV1283

• Scrap was decreased, from 1% to 0.2%.

• Cycle time reduced from 35 seconds to 30 seconds by better control of injection
temperature and pressure.
• Line previously staffed with 2.0 workers now staffed with 1.5 workers, due to newer
process controls: one operator looked after two lines while dedicated helpers handled the
unloading and deburring.
• Gates and runners were modified to reduce wasted material from 20% to 15%.

Current pricing is shown in Table 1.

Table 1. Current pricing details.

Part number M103-2097R

Estimated annual volume 500,000 units/year
Sales price $2.238 each plus tooling
Revenue $1,259,000
Cost $1.844 each plus tooling
Tooling cost $210,000 for four cavities
Tooling life 750,000 pieces (1.5 years)
Estimated annual cost Parts: $922,052
Tooling: $140,000
Total: $1,062,052
Profit $196,948

DOSA expected demand for the M104 to be comparable to the demand for the M103.
Chung was pleased. The M103 business was profitable, but the opportunity to make both parts
would cut costs substantially. While a single part could be made in a four-cavity die (as was the
case with the M103 parts), the volume on two parts would justify a six-cavity combination die
(three cavities for each of the two parts). The six-cavity die would increase throughput of the
casting operation by almost 50%. Even with the higher work-center billing rate for the machine
that could handle the larger die, the savings would be significant. Chung’s cost estimates for
making one or both M104 parts are shown in Table 2.

This document is authorized for use only by Farid Alfonso Pool Estrada (LUXOR._.SETH@HOTMAIL.COM). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
 -3- UV1283

Table 2. Cost estimates for making M104 castings.

One Part Both Parts

Part number M104-2097R M104-2097R/L
Estimated annual volume 500,000 units/year 1,000,000 units/year
Cost $1.683 each plus tooling $1.590 each plus tooling
Tooling cost $210,000 for four cavities $315,000 for six cavities
Tooling life 750,000 pieces (1.5 years) 1,125,000 pieces (1.125 years)
Estimated annual cost Parts: $841,383 Parts: $1,590,364
Tooling: $140,000 Tooling: $280,000
Total: $981,383 Total: $1,870,364

1
Although Chung had originally negotiated a 7.4% profit on the M103 parts, the
profitability had risen to 17.6%. Now that his shop was highly utilized, he would not accept any
profit from DOSA below 15% for one part, or 13% for both parts. The costing worksheet for
M104-2097R/L is shown in Table 3.

1
Profit was defined as percentage of revenue and did not include tooling cost, which was passed through from
the toolmaker to the customer with no markup.

This document is authorized for use only by Farid Alfonso Pool Estrada (LUXOR._.SETH@HOTMAIL.COM). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
 -4- UV1283

Table 3. Costing worksheet for M104-2097R/L.

Annual volume 500,000 pieces
Computed
Item Detail Entered Value Value Cost/piece Total Contract

Material
Finished Weight (lbs/piece) 1.17
Wasted Material (%) 20%
Wasted Material (lbs/piece) 0.23
Material price ($/lb) $ 0.91
Salvage value ($/lb) $ 0.60
Material cost ($/piece) $ 1.14
Defect Rate (%) 0.2%
Cost of Defects ($/piece) $ 0.002

Total material cost ($/piece) $ 1.140 $ 569,760

Direct Labor
Cycle Time (seconds/shot) 27.00
Cavities (pieces/shot) 4.00
Process time (sec./piece) 6.75

Setup (hours/batch) 3.00

Batch size (pieces) 20,000
Setup time 0.54

Downtime (%) 15%

Downtime per piece (sec.) 1.29

Total time (sec./piece) 8.58

Labor rate, fully loaded ($/hr) $ 30.00

Operators, casting (#) 0.50
Operators, unloading & deburring (#) 1.00
Hourly rate ($/hr) $ 45.00
Defect Rate (%) 0.2%
Cost of Defects ($/piece) $ 0.000

Total direct labor cost ($/piece) $ 0.107 $ 53,710

Overhead (Work Center)

Indirect labor ratio (ind./dir.) 1
Direct labor cost ($/piece) $ 0.107
Indirect labor cost ($/piece) $ 0.107

Process equipment rate ($/hr) $60

Total time (sec./piece) 8.58
Machine cost ($/piece) $ 0.14
Defect Rate (%) 0.2%
Cost of Defects ($/piece) $ 0.001

Total work center cost ($/piece) $ 0.251 $ 125,432

SG&A
Rate applied to material (%) 9%
Material cost ($/piece) $ 1.140
Rate applied to process (%) 23%
Process cost ($/piece) $ 0.358
Total SG&A cost ($/piece) $ 0.185 $ 92,481
Total Cost ($/piece) $ 1.683 $ 841,383

This document is authorized for use only by Farid Alfonso Pool Estrada (LUXOR._.SETH@HOTMAIL.COM). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.