VENTURI INDUSTRIES CASE
Background
Venturi Industries commenced operations in 1967, primarily as an industrial sheet metal fabricator. Since 1977 this privately owned firm in Hanover Michigan has produced a wide range of components for a number of different residential and commercial gas furnace applications – they do not assemble, distribute or retail the final furnace – they simply manufacture parts that go into the furnace. The company now employs 55 individuals and until recently has demonstrated annual profits of 15%. For the last two years the company has been operating at about a 5% loss and there is considerable pressure to turn this situation around.
The Concept
Approximately three years ago, as Marie Simpson was driving her car to work it dawned on her that some of the technologies that they were using in the furnace industry could be applied fruitfully to cars as well. The one part in particular that she thought might be suitable was an oxygen-enhancement unit that used an electronic catalyst system to remove impurities from the air and boost the overall level of oxygen flow in the combustion chamber. This resulted in a cleaner burn and therefore a more efficient system. In her spare time, Marie had been working on prototype after prototype. After the fourth iteration she felt that she had something that was marketable (see Exhibt A for a photograph). In preliminary tests Marie found that her Oxygen Catabolizer Module (OCM for short) was able to reduce gas consumption on her vehicle by 19%. In a nutshell, other than the $37,000 in personal funds she had put forward to build this, she was ecstatic.
Accounting Issues to Sort Through
Marie Simpson wanted to keep the costs down. Based on fundamentals of economics, she realized that the lower the cost, the higher the demand would be. Given that the company had a “cost plus 35%” markup pricing, she wanted to keep the items that went into this as low as possible. Bruce Meyers, the CFO, had argued that this project would initially take up 20% of the engineering departments time, and then 10% of the production capacity, so he figured it was reasonable to allocate a flat 15% of the overhead of the organization when determining the cost of the project. In terms of variable costs, there were other issues. Years ago a very large stockpile of aluminum had been accumulated as part of a now discontinued project. The cost of this aluminum had already been accounted for in previous budgets and expensed as part of standard accounting procedures in reporting revenue to the IRS. Marie Simpson argued that because the aluminum had already been paid for and written off, that the cost of this aluminum not be factored into costing (and thereby pricing) decisions, until it was necessary to purchase new aluminum. Meyers, on the other hand, argued that the aluminum could be sold to the market and therefore it retained value that should be accounted for in the pricing decision. He thought it was charitable to suggest that the transfer cost would only be 80% of its market value. To put things in perspective, the variable cost associated with non-aluminum parts was roughly $72. The aluminum, at market value was approximately $5. Despite the considerable tension over the accounting matter, everyone in the boardroom agreed that the idea was good, but maybe too good, if they did not get this to market soon surely a competitor would beat them too it. However, this squabbling about the costing seemed to be jeopardizing their chance to capitalize on their good fortune of having invented this unit.
Thanks for Helping Out
The good news for them is that based on your passion for both accounting and marketing you have been brought in to help guide their efforts – in particular, they are very interested in how much you would spend marketing this product and what impact the method of costing the aluminum would have on demand (i.e., should it be zero because it was already “written off”, 80% of market value, or something different). Please do not let the fact that Marie Simpson and Bruce Meyers have been openly hateful toward each other over the last 9 years influence your opinion.
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Question:Briefly articulate what Venturi industries needs to be cognizant of in order to be competitive (list and describe each of the key elements associated with competitive intelligence along with something Venturi could do). Target length, 1 page. The purpose of this question is to facilitate key elements that foster competitiveness, with the thought being that information analytics/metrics that shed light on one or more of these areas may increase competitiveness. –
