A

PRESENTATIO
N ON CASE
STUDY:
PROJECT
SPARROW
SUBMITTED BY:
MD. ASLAM MUSALMAN
 ABOUT SPARROW

SPARROW WAS A CHEMICAL MANUFACTURER BASED IN GERMANY. THE COMPANY HAD

TWO MAIN PRODUCT CATEGORIES:  BASIC CHEMICALS AND SPECIALTY CHEMICALS.

BASIC CHEMICALS WERE COMMODITY CHEMICALS DERIVED FROM OIL AND 

PETROLEUM BY-PRODUCTS. SPECIALTY CHEMICALS WERE HARDENED OR CURED
POLYMERS, SIMILAR  TO PLASTIC.

SPARROW’S BASIC AND SPECIALTY CHEMICAL DIVISIONS WERE NOT RELATED TO EACH

OTHER.

SPARROW CURRENTLY HAD TWO MANUFACTURING FACILITIES: ONE LOCATED IN THE

UNITED STATES, AND ONE LOCATED IN GERMANY. THE GERMAN FACILITY
MANUFACTURED BOTH BASIC AND SPECIALTY CHEMICALS, WHILE THE US PLANT
MANUFACTURED ONLY BASIC CHEMICALS.
 SPARROW’S PRICING STRATEGY FOR THE IMPENDIUM BID 
SPARROW UNDERWENT A BIDDING PROCESS FOR ALL ITS CHEMICAL CONTRACTS, EACH
CUSTOMER WOULD RE-EVALUATE ITS  CHEMICAL PRICING AT LEAST ONCE PER YEAR.
CUSTOMERS WERE GENERALLY PRICE-CONSCIOUS AND SWITCHED SUPPLIERS QUICKLY IF A
DIFFERENT SUPPLIER OFFERED SIGNIFICANTLY LOWER PRICES.
IMPENDIUM WAS ONE OF  SPARROW’S LARGEST BASIC CHEMICALS CUSTOMERS AND HAD
PURCHASED CHEMICALS EXCLUSIVELY FROM SPARROW FOR THE PAST TWO YEARS.
IMPENDIUM’S BOARD OF DIRECTORS WAS PRESSURING THE SPARROW TO CONSIDER MULTIPLE
SUPPLIERS IN AN EFFORT TO CUT COSTS.
PREVIOUSLY, THE PRICING MANAGER HAS PRICED THE CONTRACT BASED ON THE
SALESPERSON’S RECOMMENDATIONS AND HIS OWN COSTING ESTIMATES.
 THE PRICING MANAGER HAD PROVIDED THE MONTHLY JOB COST  SHEET FOR IMPENDIUM’S
ORDER TO  DEVELOP A PRICING STRATEGY.
 MARKET DYNAMICS

SPARROW WAS ONE OF THE SMALLEST BASIC CHEMICAL PRODUCERS IN

AN INDUSTRY WHERE THE FOUR LARGEST PLAYERS  CONTROLLED 80 PER
CENT OF THE GLOBAL PRODUCTION CAPACITY.
LARGE PLAYERS CONVERTED BASIC CHEMICALS INTO MORE COMPLEX
PRODUCTS AND, AS A RESULT, WERE OFTEN ABLE TO GENERATE MUCH
HIGHER PROFIT MARGINS.
THE GLOBAL AVERAGE PRICE OF BASIS CHEMICALS WAS USED AS A
BENCHMARK WHEN SELECTING SUPPLIER.
THE MAIN DETERMINANT OF THE GLOBAL AVERAGE PRICE  WAS THE
GLOBAL CAPACITY UTILIZATION RATE.
 SPARROW’S BASIC CHEMICAL COST

SPARROW WAS ONE OF THE SMALLEST BASIC CHEMICAL PRODUCERS IN AN INDUSTRY WHERE THE FOUR
LARGEST PLAYERS  CONTROLLED 80 PER CENT OF THE GLOBAL PRODUCTION CAPACITY.
LARGE PLAYERS CONVERTED BASIC CHEMICALS INTO MORE COMPLEX PRODUCTS AND, AS A RESULT,
WERE OFTEN ABLE TO GENERATE MUCH HIGHER PROFIT MARGINS.
THE GLOBAL AVERAGE PRICE OF BASIS CHEMICALS WAS USED AS A BENCHMARK WHEN SELECTING
SUPPLIER.
THE MAIN DETERMINANT OF THE GLOBAL AVERAGE PRICE  WAS THE GLOBAL CAPACITY UTILIZATION
RATE.
IMPENDIU Department Volume
(kt)
Material
Cost (per
kt)
Labour
Rate (per
kt)
Depreciation
Cost (per kt)
Cost Overhead

Applied
Total

M US Basics 10.0 $ 585.00 $ 105.00 $ 415.00 $

CHEMICAL
11,050.00

Germany 15.0 $1,125.00 $ 150.00 $ 275.00 $

S JOB COST
23,250.00
Basics

SHEET
Germany 1.0 $1,698.00 $ 550.00 $ 325.00 $
2,573.00
Specialties

Total 26.0 –– –– –– $
36,873.00
 SPARROW GMBH’S BUDGETED COSTS FOR 2020

DIRECT LABOUR $ 279,450 

DIRECT MATERIAL 985,500  
SUPERVISION 200,000 
GENERAL MANAGER’S SALARY 140,000 
SUPPLIES 21,000 
SHIPPING AND RECEIVING 34,500 
POWER 140,000 
WAREHOUSING RENT 120,000 
OFFICE RENT 30,000 
DEPRECIATION ON MACHINERY 225,000 
INSURANCE ON MACHINERY 24,000 
REPAIRS 63,000 
SELLING EXPENSES 70,000 
ADMINISTRATIVE EXPENSES 33,500
 Total US Basics Germany Germany

Direct Costs:
Basics Specialties

SPARROW GMBH’S
Direct labour $279,450 __________ __________ __________
ANNUAL COST
ASSIGNMENT AND
Direct material 985,500 __________ __________ __________

Depreciation on machinery 224,850 __________ __________ __________

Total direct costs

Factory Overhead Costs

$ 1,489,800 __________ __________ __________

ALLOCATION
Supervision

Supplies
$ 200,000

21,000
__________

__________
__________

__________
__________

__________
WORKSHEET
Power $140,000 __________ __________ __________

Warehouse rent $120000 __________ __________ __________

Insurance on machinery $24000 __________ __________ __________

Repairs $63000 __________ __________ __________

Total factory overhead costs $568000 __________ __________ __________

Administrative Costs

General manager $ 140,000 __________ __________ __________

Shipping and receiving 34,500 __________ __________ __________