ATHENS GLASS WORKS

The project manager for non-glare glass, Christina Matthews, and the controller of
the specialty glass division at AGW, Robert Alexander faced pressure by the senior
management to improve the profit margins of the non-glare glass to contribute to
the future expansion plans, due to which they increased its price in September 1992
from $2.15 to $2.36 which resulted in a significant loss of AGWs market share in
the next 9 months due to unprecedented price maintenance by its competitors.
Hence, now in August 1993, they face a major challenge pertaining to the setting of
price of the non-glare glass for the coming quarter such that the profit margins and
market share are improved to satisfy the concerns of the senior management while
clearly identifying their objectives and solving problems related to high unit costs.

The objectives we have identified from the case are as follows:

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Business Performance Objectives

Maximize profit margins
Reduce unit costs
Recapture/increase market share
Quality and Efficiency Objectives
Maintain fast and reliable service
Maintain high product quality
Shorter delivery times
Reliable customer service

Choose Best Price

Maximize Profit Margins

Maximize Quality

Reduce Unit Costs

Regain Market Share

Increase Sales

Maintain fast & reliable service

Reliable customer service

Shorter delivery times

Analysis:
When reviewing the anticipated cost schedule, Christina and Robert noticed
that the unit costs were increasing with the increasing volumes but the
explanation for that was the system of allocating costs that AGW had
adopted. Based on this information, we revised the cost data to regroup
costs as they should be under normal circumstances and came up with two
possible ways of finding the optimum profit margin when comparing the two
prices; the original configuration of costs and the regrouped configuration.
One thing that is common in both scenarios is that the depreciation costs are
fixed regardless of the production volume and with increasing production
volume, the cost per unit decreases as the total is spread over many units.
Also, selling and admin costs are taken as 45% of manufacturing costs, and
are, therefore, variable costs.
In the original case, as can be seen in the influence diagram, exhibit ( ), the
final objective i.e. profit margin, depends on the Total revenue and the Total
costs, where price and sales volume are both decision variables, and so is
the production volume. It can be seen that the only fixed cost included in the
diagram and the calculations, is the depreciation cost, the rest are all
deemed variable. Based on the information with regard to the possible sales
on both the prices, $2.15 (275,000 units) and $2.36 (150,000 units), in
exhibit ( ), we have calculated, after subtracting the fixed costs from the
contribution margins, the profit margins equivalent to $(13,750) for $2.15
and $13,500 for $2.36. Therefore, the preferable price according to this cost
allocation system is $2.36.
In the second scenario, as shown in the influence diagram, exhibit ( ), the
profit margin is dependent on the total revenue and total cost. Again,
decision variables include the price, sales volume and the production
volume. The difference lies in the allocation of fixed costs. Under normal
circumstances, general overheads are taken as fixed but in AGWs system,
they are not. So, when the costs are regrouped based on our assumption that
general overheads are fixed, they are identified as separate fixed input
parameters rather than variables. As a result of these assumptions, the
calculations in exhibit ( ) show that for the price of $2.15 and sales of
275,000, the profit margin is ________, and for the price of $2.36 and sales of
150,000, the profit margin is _____. Therefore, based on this model, the
recommended price for the non-glare glass for the last quarter of 1993 is
$2.15.