Cumberland Metal Industries

CUMBERLAND METAL INDUSTRIES

TO: ROBERT MINICUCCI

FROM: THOMAS SIMPSON

SUBJECT: CURLED METAL CUSHION PADS PRICING

DATE: 10/2/2007

Overview

Cumberland Metal Industries (CMI) is seeking to diversify its product line. A Houston area sales representative has made us aware of the use of curled metal in pile driving as a cushion to absorb shock. The curled metal pads have been tested by two contracting groups, Colerick and Fazio, both with promising success and noticeable advantages over the current asbestos pads.

Colerick has requested pricing so that they can purchase and use our pads on other job sites. Colerick has been told CMI will give them pricing information by the end of the week. Price is the first priority which will be analyzed by cost savings to company, manufacturing costs, and break-even volume. Marketing options will also be analyzed based on the market share, market size, and sales force size.

Analysis

Benefits of Coiled Metal Pads

Coiled metal pads drive 30 times more piles per pad than asbestos pads because they transfer more force and prevent shock while creating less heat than the conventional asbestos pads (Exhibit 1). This also helps to prevent piles from vibrating or cracking. Coiled metal pads only heated up to 250Ñ"F, or 450Ñ" less than asbestos pads. Health dangers associated with asbestos have also made those who use the asbestos pads wary of the risks.

Value to Contractors

From the two experiments with CMI's coiled pads the contractors averaged 30% more feet driven per hour with our coiled pads over typical asbestos pads. The pads also drove 2800% more piles per set of pads than did the asbestos pads. The contractors averaged 630 asbestos pads used for the project; at a cost of $1,575. The total time to change sets was 700 minutes. With our coiled metal pads they used 11 pads with a change time of 4 minutes (Exhibit 1).

Market Size

It is estimated that there are 19,500 to 26,000 hammers in use 25 weeks per year for 30 hours per week. These hammers average 20 feet per hour for 290 million to 390 million feet driven annually. If six pads per set will drive 10,000 feet then the market for coiled metal pads would be 174,000 to 234,000 pads annually (Exhibit 2).

Market Share

Manufacturing cost estimates are based on a 250 unit per month production schedule. For twelve months CMI would produce 3000 pads per year, or 500 sets of a single coiled metal pad size. With a potential market demand of 174,000 to 234,000 pads annually CMI would only be capturing less than 2% of the market (Exhibit 2).

Basic Pricing based on Manufacturing Costs

The most common pad size is 11 1/2". Total cost per pad would be $148.12 using current equipment or $69.18 with the purchase of $50,000 permanent tooling equipment. CMI seeks for a 40-50% margin allowing for a price of $269.31 or $125.78 respectively (Exhibit 4).

Break-Even Volume

With a margin of $121.19 for existing equipment the break-even volume would be 214 units per month. For the permanent tooling equipment the margin is $56.60 which has a break-even volume of 185 units per month (Exhibit 4). Both break-even volume numbers are within CMI manufacturing capabilities. To increase CMI unit production capability equipment at a cost of $75,000 per 250 units could be purchased.

Markets and Sales Force

CMI has been settling on signing construction-oriented manufactures' representatives who sell non-competing products on commission. These representatives would be able to sell the pads to distributors and supply houses. However, CMI could employ its own sales force to connect with retailers, distributors, rental companies, and even manufactures to promote the benefits of coiled metal pads produce sales. It is estimated sales representatives would each cost $40,000 per year.

Recommendations

Pricing

The cost of a sales representative per unit is $13. This raises the fixed cost and requires us to reevaluate its price including sales force requirements. At the same time CMI can evaluate prices at a 45% and 60% CM (Exhibit 5).

To keep the price down it is recommended CMI purchase the $50,000 Permanent Tooling equipment. This will allow CMI to employ a sales force of six and CM of 45% and break-even at 250 units.

Sales Force

An initial sales force of six individuals would both be an acceptable sales force size for the first year of distribution. This would allow for a strong entrance into the market. In two to three years increase the sales force size to ten as we increase our market share and the permanent tooling equipment is running. At that time CMI can maintain the break-even volume will be 250 units at a 45% margin (Exhibit 5).

Marketing Program

CMI could focus on two main targets which we should use to enter the market and to introduce coiled metal pads. The first task is to focus on hammer distribution companies. By securing distribution at the locations that sell pile hammers the customer will be able to secure pads and hammers at the location purchased or rented from.

Second the sales force should attend trade shows and industry gatherings for Architectural and Consulting engineers. These individuals, while not purchasers, are one of the most important influences on contractors.

Exhibits

Exhibit 1

Value to Contractors

Colerick Asbestos CMI Fazio Asbestos CMI

Feet/Hour 150 200 Feet/Hour 160 200

Piles/Pad 15 300 Piles/Pad 6 300

Pads/Set 24 6 Pads/Set 12 5

Sets Requred 20 1 Sets Requred 50 1

Set Changes 20 1 Set Changes 50 1

Time to Change Set 20 4 Time to Change Set 20 4

Cost per set $50 Not Charged Cost per set $40 Not Charged

Average Asbestos CMI