For the exclusive use of J. Martinez, 2020.

BAB278/ MAY 2015

TENALPINA TOOLS:
PRODUCT LINE EXPANSION
“Now comes the real test,” Giulia thought to herself, “evaluating my idea for expanding the
product offerings.” She gathered up her notes and opened a blank spreadsheet file on her
laptop.

Just a few months ago, Giulia Ferrato’s fledgling business, TenAlpina Tools, was at a
crossroads. The contract manufacturer of her only product, rock climbing pitons, wanted to
sell his business and retire. Meanwhile, her customer wanted to quadruple purchase volume
under an exclusive relationship. She had performed an initial analysis of the profitability of
running the factory herself and found it less than reassuring. In the end, however, she felt
that controlling the production facility was an opportunity she couldn’t pass up. Now she
wants to offer a new product line to take advantage of the underutilized capacity in hopes of
improving the company’s financial situation.

The Beginning

About a year ago, when Giulia returned from her internship between the first and second
years of her MBA program, she began to research the potential to produce high-quality pitons
from titanium. Pitons are like flat spikes, and rock climbers hammer them into crevices in the
rock wall in order to attach support lines, making them a critical tool for the climbers. She
was able to design a piton made of titanium that offered superior tensile strength while
weighing significantly less than the standard steel alloy product. She also found a company
that did drop-forging—an integral part of the production process—which had excess capacity
and could produce the product in volumes Giulia believed she could sell. Her first order of

This case was prepared by Alfred J. Nanni, Jr., Provost, Professor of Management Accounting, and Paul E. Juras, Chair of
Accounting and Law Division, Professor of Management Accounting and Operational Performance, both of Babson College.
It was developed as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative
situation. It is not intended to serve as an endorsement, source of primary data or illustration of effective or ineffective
management.

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Tenalpina Tools: Product Line Expansion
BAB278 / MAY 2015

1,000 units evolved into a guarantee to purchase a volume of at least 4,000 units per month
for the length of a two-year contract. At that same time, the owner of the company doing her
manufacturing, a man named Stanley Kowalchek, offered to sell her his forge.

Giulia initially worried that, if the business failed, she might be left with operating capacity
for which there was little, if any, demand. However, she quickly realized that Kowalchek was
already in that situation. Giulia recognized that she was in a position of strength in the
negotiation. Exercising that leverage, she got Kowalchek to agree to sell her his business at
the net book value of $86,130. At the sale date, that amount comprised only the plant
equipment because there were no receivables, inventory, or intangible assets. Giulia’s father
had previously agreed to invest in her education, but in a non-traditional manner. He gave
her the equivalent of the tuition she had spent on her recently completed 2-year MBA
program to gain the practical education that would come from running a business. Adding
that to her savings, she made the purchase and invested the remainder into the business.

She kept the six experienced laborers on payroll at their existing pay rate and began
production immediately. They needed no ramp-up time to learn the process since they
already had experience making the pitons. She signed the exclusive arrangement with her
customer, guaranteeing purchases of at least 48,000 pitons per year for two years. After a
short shakedown period to familiarize herself with the operations and the administrative and
record-keeping duties she had to perform, she refocused her attention on her new product
idea—a titanium wall hammer.

The New Product

Rock climbers felt the major value provided by the titanium pitons were their performance
and longevity, characteristics that matched the best steel alloy products, but at a superior
light weight. Giulia expected that this comparative advantage would be even greater for the
hammer, because current models often weighed close to 2 pounds. Competing wall hammers
consisted of a steel head and a wooden or fiberglass handle. In contrast, Giulia’s design was a
“unitized” head and handle shaft (or haft). The titanium haft was very thin and yet stronger
than the competition’s handles. It was also quite lightweight, concentrating all of the weight
in the head and enhancing performance for both driving and removing pitons. This thinness,
however, created a design problem that Giulia saw as another opportunity. The handle
needed to be thick enough to be comfortable in the climber’s hand. Giulia designed a padded
handle that not only provided appropriate grip-size ergonomics, but also isolated the
climber’s hand from the considerable shock generated when driving a metal spike into rock.
This padded handle could be most effectively provided through an injection-molded soft
nylon-vinyl handle, bonded through the haft for secure hold. Refer to Exhibit 1 for an
illustration of an example of a competitor’s product.

A New Machine

Since Giulia’s factory did not have an injection molding machine, she would need to acquire
one. Her research found that she could buy and install the necessary equipment for $35,000.
She found this machine would only have a seven-year life and added this information to the
depreciation schedule (see Exhibit 2). There would be sufficient available floor space for an
injection molding station in the factory once some of the existing equipment and racks were
rearranged.

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Tenalpina Tools: Product Line Expansion
BAB278 / MAY 2015

With the design specifications and the molding machine’s operating characteristics in hand,
Giulia felt she could estimate values for many of the remaining variables she needed to
examine. First, she calculated the amount of titanium alloy and plastic resin each hammer
would consume. At current input prices, the cost for volumes less than 10,000 per year would
be $10.44 per unit. The engineering specifications on the molding machine indicated that it
would consume significant amounts of electricity with each injection and cooling cycle. Based
on the volume of material used in molding, she calculated each wall hammer would require a
total of $0.46 of energy cost, including power for the other manufacturing steps. Without any
better information, she assumed that the per unit supplies costs would be a little more for the
hammers than for the pitons, and estimated the amount to be $0.14 per unit. She collected
some data for current operations and projected costs, which appears in Exhibit 3.

Estimating Price and Demand

In the case of the pitons, her customer was the one who gave her the price and quantity. She
did not want to be constrained by a similar relationship going into a new product line, so she
tried to reverse-engineer those parameters from other information. After doing some online
investigation and talking with several rock-climbing equipment retailers, she arrived at a
target retail price of $94, the same price as a high-quality competitor. Reversing the markup
her piton customer used (he was getting about a 35% gross margin), she determined that her
price to retailers and distributors should be $61. Based on what she had been told by the
retailers with whom she spoke, she decided that the hammers would generate a demand
equal to about 350 units per month.

Manufacturing Parameters

Giulia sat down with her production team to discuss the effect on production of adding 350
hammers to the monthly production schedule. The experienced workers’ analysis of the new
work requirements based on the hammer’s design revealed that it would require more labor
effort per unit at each existing work station. Talking through the manufacturing process, they
quickly determined that the current staffing level would be insufficient. The inadequacy of the
resources was due in large part to the current work flow that had employees moving from
station to station, thereby reducing available productive time. They decided that the
installation of the new machine also provided an opportunity to rearrange the work flow by
moving some of the existing equipment. The new machine and the redesigned work flow
meant that they could easily handle the additional demand of 4,200 hammers a year with just
two more laborers.

In the new arrangement, there would be six work stations:

1. Roll/cut
2. Heat/forge
3. Bore (drilling)
4. De-burr and Polish
5. Injection Molding
6. Packing

3
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 For the exclusive use of J. Martinez, 2020.
Tenalpina Tools: Product Line Expansion
BAB278 / MAY 2015

Under the proposed staffing plan, each of the six steps would have one permanently stationed
employee except for the first two, which would have two each. Overall, given the total
expected demand, they estimated that the hammers would consume 37% of the total
productive labor time. (Giulia decided to use this percentage of direct labor time as the basis
for allocating production costs other than materials to each product line in order to calculate
product gross margins.)

The work team told Giulia that she could simply follow tradition in filling the new two
additional positions. She could hire the last two workers that had been laid off by Kowalchek
a few months previously. The two would be ready to return to their old work arrangements
(which included the same policies and wage rate paid to the current workers).

Selling and Administrative Costs

Giulia’s current customer for the pitons was willing to absorb the cost of delivery, but she did
not think this arrangement would hold for the hammers. She estimated shipping costs to be
$1.00 per unit. She also felt that it might be time to start taking a modest salary. Giulia
decided that a salary and benefits amount just 10% above that of the factory workers would be
appropriate at this stage in the company’s life, but she also wondered what kind of effect this
would have on profits.

“Before entering data into the blank spreadsheet,” Giulia thought to herself, “I ought to spend
some time trying to organize my thoughts. First, I want to know what to expect in terms of the
overall profit effect of adding the hammer to my product line. How many hammers will I have
to sell just to keep my annual profit the same as it is now? Also, is the investment in the new
injection molding machine justified? What will the gross margin be on the new hammer? And
will it affect the gross margin on the pitons?”

4
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 For the exclusive use of J. Martinez, 2020.
Tenalpina Tools: Product Line Expansion
BAB278 / MAY 2015

Exhibit 1: Example of a Wall Hammer

Source: Nick4Penta (own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via

Wikimedia Commons: http://commons.wikimedia.org/wiki/File%3AIce_Hammer_K7NS1013.jpg.
Accessed May 2015.

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Tenalpina Tools: Product Line Expansion
BAB278 / MAY 2015

Exhibit 2: Depreciation Schedule, Including Estimate for Injection

Molding Machine1

Subtotal
Oven & Deburr
Machine Cold roll (making Injection
drop- Bore and Package Total
type and cut just mold
forge polish
pitons)

Cost $29,000 $88,000 $15,000 $9,000 $2,550 $143,550 $35,000 $178,550

Life 10 10 10 10 10 7

Annual $ 2,900 $ 8,800 $ 1,500 $ 900 $ 255 $ 14,355 $ 5,000 $ 19,355

depreciation

Exhibit 3: Current and Estimated Cost and Revenue Data

Current Results
Average monthly piton demand 4,200 units
Selling price per piton $10.50
Annual worker labor cost (fully-loaded, including benefits) $ 57,500 per
worker
Annual machine and tool depreciation (existing machines) $ 14,355
Annual occupancy cost (including building lease) $ 33,000
Annual lighting/heating/utilities cost $ 29,808
Direct material cost per piton $ 1.45
Variable energy cost per piton $ 0.18
Variable supplies cost per piton $ 0.11
Annual administrative costs $ 7,200
Estimated Information
Increase in fixed utility costs due to new machine $864
Material costs (per hammer) $10.44
Utility costs per hammer $0.46
Supply costs per hammer $0.14

1Since Giulia had purchased the business, she had inherited both the net book value of the machines and their
associated depreciation schedules. Thus, annual depreciation on existing equipment would remain at $14,355 per
year.

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