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Case Assignment Questions
- Describe the cost drivers for unit/room air conditioning (be comprehensive). How do the drivers differ between Tork and Haier for the low-end model, Model A? (1 point)
- Is Haier’s Model A cost advantage sustainable? Why or why not? (1 point)
- Does Haier’s advantage extend to the larger range of room air conditioning products, and specifically to Model F? In answering this question, use case data for Model A to extrapolate (calculate making reasonable assumptions as needed) the cost differences between Tork and Haier for Model F. (4 points)
- How should Tork respond to the Haier offer? Why? (1 point)
Tork Tips:
- The Model F data in Exhibit 4 is organized in terms of cost-accounting elements. Thus, in answering question 3, organize your detailed Tork and Haier cost driver allocations for Models A and F into the following four categories: Materials, Direct Labor, Freight, and Overhead.
- The total overhead costs for Tork and Haier have two components: labor-related overhead costs and fixed-asset overhead costs (fixed-asset overhead costs are based on variations in utilization as pointed out in the case).
- Assume that the proportions associated with the total overhead costs for Tork’s Model A similarly apply to its Model F. That is, allocate two-thirds of the total overhead costs for Tork’s Model F to fixed asset costs and one-third to labor overhead costs.
- Capacity utilization is defined as the production volume divided by the available capacity.
- In reference to Exhibit 3, the power of air conditioners increase with increases in the BTUs (British ThermalUnits). Models are increasingly sophisticated and powerful as you progress from Model A to Model F.
- The domestic freight cost is based on the box dimensions, not the unit weight.
Tork Clarifications:
- There is a $4.25 per unit weight cost saving for Haier relative to Tork for Model A. For Model F, assume that there is no substantive cost difference between Tork and Haier related to the type of materials used for each part (i.e., weight cost driver).
- The Haier $6.22 per unit volume cost saving relative to Tork for Model A is given and cannot be calculated from other case data. For Model F, assume that Tork has a $9.75 per unit volume cost saving relative to Haier.
- Assume that the Model F assembly time is the same for Tork and Haier (the assembly time for Tork’s Model F can be extrapolated using case data).
- Assume that the domestic freight cost for Tork’s Model F is $10.19 (since the cubic feet of the box for Model F is roughly double the cubic feet of Model A).
- Assume that the capacity utilization for Model F is 70% for both Tork and Haier.
- Calculate the labor overhead costs for Haier’s Model F based on the proportion of Haier to Tork labor overhead used in Model A ($10.55:$15.00). In other words, the labor overhead cost for Haier’s Model F is 70.3% of Tork’s Model F and can thus be calculated by multiplying the derived Tork Model F labor overhead costs by 70.3%.
- The case specifies two different values for Tork’s Model A material costs: $170.00 (p. 4) and $170.25 (p. 3, Exhibit 2, and Exhibit 4). Use the $170.00 value for Tork’s Model A material costs in your analysis. Correspondingly, Tork’s Model A costs a total of $279.20 (and not $279.45) to produce, so be sure to use this value in your analysis as well.
