 |
 |
 |
 |
|
 |
 |
The company occupied ageing premises near the South Coast of England. These
premises cost £35,000 per annum on a 25 year lease. As with almost other leases, the
lease was subject to a 5 year uplift. Previous rent reviews had meant a 10 per cent
increase. With the next review - one year ahead - management were considering whether
the investment in a rent review negotiator, at a cost of around £3000, would be
appropriate. It was anticipated that the potential saving would be approximately one half of
the likely rent increase. The company also paid £10,000 per annum on local property
taxes. This was likely to increase at around 5 per cent per annum. There did not appear to
be any method by which this obligation could be reduced. Nearby on the same industrial
estate, larger premises were available at an annual rent of £47,000, with a property tax of
£12,000. At present, the total heating and lighting bill was £5000 per annum, and this
would not rise with any move to larger premises as they were better insulated with more
efficient systems. Investment in a new integrated heating and lighting system was
regarded as an important promotional device for the company
The company received sales enquiries from its direct mail activity or via directories and
from previous customers. Herbert Engineering then produced a quote based on the
creation of manually generated drawings. On average each design took 12 hours of work,
followed by a quotation process which took a further 2 hours as the specification was
manually converted to costs. On average the company received 200 projects to quote on
every year. Because of staff limitations, the company was only able to handle around 100
a year.
Investment in a sophisticated computer aided design system would cost around £12,000 in
addition to the four weeks training that would be necessary - suggesting an overall direct
cost of £15,000. Herbert Engineering had been offered a 3 year lease on the basis of
£600 per month, with no residual value. Once the system was fully installed it was
estimated that drawings could be produced in 2 hours, with the automatic production of
costs on the basis of the specified components. The managing director then took the
finished drawings to negotiate with the customer in the majority of cases - the overseas
agents acted as intermediaries in other markets. Each customer took a further 5 hours
negotiation on average to finalise the contract, whether it was successful or not. Over the
past 3 years, the percentage success rate had remained static at 40 per cent, with the
company gaining a far greater share of the more sophisticated end of the market As many
of the contracts for basic generator systems were won on the ability to supply at short
notice, the company continued to hold a basic stock of engines and other components.
This made up a substantial proportion of the inventory. Eight staff worked in assembly,
which involved welding and a substantial amount of physical movement within the factory.
The costs to the company of the shopfloor staff - including the one supervisor - was
£120,000 per annum. Wage costs in this area of the company had grown, on average, by
10 per cent per annum.
Two staff were involved in the design, development and manufacture of the control panels,
both for the existing generator systems and for the new venture into integrated heat and
power units. These staff, one director and one skilled worker, cost the company £40,000
per annum. Currently the company bought in all the components including the circuit
boards. This made the control boards very expensive to manufacture as almost each unit
had to be hand-built by subcontractors. On an index figure of 100, the three product areas
of the company had a cost breakdown provided in Table 11G.
Table 11G. Cost component of product range by type, index figure of 100.
System
 |