Cumberland Metal Industries

Cumberland Metal Industries (CMI) should price their new cushioning pads at $900 to maximize profit. CMI should begin by targeting the customers that will find the greatest value in the product an pay the most. This allow the company to maximize unit contribution, and leave available options for dealing with future competition and sales challenges.

Customer

CMI estimates a potential customer base of 19,500 to 26,000 actively operating pile drivers in the United States. Currently the marketplace approaches cushion pads as an afterthought; pads are available for $2-$10 depending on size. The pads are produced by various local shops; CMI will be the first major industrial producer in the market.

The introduction of a new and more expensive pad may require some time to gain acceptance in the market place. Many pads are purchased by equipment leasing companies whose incentive is to keep their equipment rented by prolonging the job; this may eliminate rental hammers from the initial market. The remaining market is divided into two groups; Independent contractors who may be skeptical about the cost and large contractors. Large Contractors are the primary market, they are interested in reducing costs, and can afford the more expensive pads, and additionally they are more likely to see the potential value in the product. There are approximately 13,000 active machines in this group. This initial market is likely to understand the value and be accepting of the $900 price.

Cost

Using the equipment CMI currently has in place pads can be produced at a variable cost of $44.44 for an 11.5 inch pad. Fixed costs for labor and equipment equal $28.80. The company prefers to consider fixed cost at an amount 360% of labor to account for engineering changing the fixed amount to 103.68. The accounting policy will not accurately reflect the engineering work required to create the pads and could be reconsidered. The pads will subsidize other products. These costs will go up in actual production because customers will require a variety of sizes of pads be produced. Management prefers a contribution margin of 40-50%. Using manufacturing cost of $148.12 the product would have to sell for at least $207.

The option to invest $50,000 for permanent tooling

Price of the substitute

Asbestos pads or a combination of aluminum and micarta are the substitute to CMI’s cushion pads. Asbestos is cheap and readily available.

At this point two customer tests of the product have been conducted one by Corelick and another by Fazio Construction. These exercises served not only as product tests but produced a good comparison to asbestos pads. There are various factors to consider in determining the true cost of each pad:

• The feet driven per hour using the pad (contractors are paid by the job, therefore the more feet per hour the better)

• The amount of time a pad can be used (the longer a pad lasts, the less pads are used, less time is lost by stopping work to change pads)

• The amount of time needed to change the pads (when pads are changed work must be stopped, shorting the amount of time needed to change is preferred)

• The cost of the pads per set ($ cost per set)

Colerick (15,000 total feet.) Fazio

Asbestos CMI Asbestos CMI

Feet driven per hour 150 200 160 200

Number of sets required 20 1 50 1

Number of pads per set 24 6 12 5

Time required to change per set 20 min. 4 min. 20 min. 4 min.

Cost per set $50 N/A $40 N/A

From this information we can draw several conclusions:

• CMI Pads allow 30% more feet per hour than asbestos.

o Assuming the pile driver works 40% of each hour and