Agro Agricultural Chemical Analysis

Executive Summary

For 2001, Agro reported a positive profit variance of $800K. However, given market conditions and other factors described below, this figure does not represent exemplary performance by this firm. Essentially, this positive variance is more about market growth and less about management performance.

Manufacturing efficiencies were solid at Krovar and Hyvar, beating budgeted cost levels. Manufacturing efficiencies at Karmex were poor, missing the budget.

Overall, Hyvar performed best; gaining 5% share in a flat market while showing a 93% performance to target (table 1). There are concerns about overcapacity which should be addressed.

Krovar showed gains in contribution margin, but analysis reveals that poor performance - most likely in the customer service division - resulted in an eroded share, and volumes significantly below expected, when adjusted for market growth.

The abysmal performance by Karmex reduced net income. They diverged from industry standard pricing by a full 10%, effectively buying market share that negatively impacted their contribution. Karmex has serious performance and strategy issues (table 2).

Agro should take this opportunity to conduct a detailed analysis of its operations and structure. Regarding its cost structure, Agro attributes manufacturing underruns from all production to this year. This had the effect of adding $58K to this year's profits. It is probably deceptive to add manufacturing variances on unsold goods to present year profit.

Though favorable market conditions have generated better budget performance than anticipated, it would be irresponsible to ignore some of the major issues this firm faces. When the market softens, the weight of immense overcapacity and poor customer service, as well as the lack of pipeline product coming from robust R&D work may seriously impact Argo.

Karmex

Karmex's performance reduced net income by $21,000 before any allocations of central costs. There are a number of contributing factors to this, primarily their diversion from industry standard pricing - presumably in an effort to increase market share. Their price per unit was 10% lower than the industry average. The incremental 110,000 units sold resulted in $231,000 in extra revenue, but incurred a marginal cost of $154,000. Thus, the margin generated was only $77,000, less the revenue loss of ($198,000), resulting in ($121,000) (table 2). Other performance issues were evident with Karmex as well. They missed fixed manufacturing cost targets, missed variable manufacturing targets, and didn't even contribute to the company profits before allocated R&D, Admin, Etc.

Agro does not hold a patent for the chemical used, and price is currently the differentiator. The market is increasingly competitive and risky, with the potential for EPA mandated changes that significantly impact all current players. Strategically, it is important for Karmex to consider developing an environmentally safer alternative in anticipation of EPA action against their key ingredient. Rather than invest in R&D (only $895,000 of budgeted $1,010,000 was spent), Karmex utilized the short-sited strategy of buying market share at a loss and potentially accelerating its demise in the marketplace. Karmex continues to have strong market share, but this product line is operating at a loss, and its contribution margin is negative, with high risk of an added barrier (the barring of the key chemical in this product). The adoption of this aggressive pricing for share strategy, in addition to the lack of involvement in the R&D space, is negatively impacting Agro.

Krovar

Krovar appears to have had a bang-up year. They beat profit expectations handily. They are in a competitive market but one apparently slated to last a long time. They beat fixed and variable manufacturing cost targets.

Although Krovar's profitability was high, volumes were lighter than expected and market share fell to 7% from 10%. This occurred in the context of a market that actually grew 20%, compounding the loss. A source of this poor performance is likely Krovar's customer service division. This is a growth market with the differentiator being outstanding customer service. There are many firms competing in this space, with no one controlling more than 10% of the market share. If anything, the sales and service areas seem to have negatively impacted the overall performance of this product.

Currently there are no patent holders in this market. While Krovar's contribution was high, it was due to efficiency rather than sales performance, as evidenced by cost numbers (table 1).

Hyvar

Hyvar's market is an oligopoly, with each firm holding approximately 25% market share. The market is relatively flat with slight growth in some years. Given this environment, Hyvar's 5% share growth during a flat year is notable. However, Hyvar's actual variable costs were higher, resulting in a 93% performance to target in terms of contribution margin (table 1).

Although fixed costs were not included in this calculation, production of 4,000,000 units with a capacity of 12,000,000 and a very stable, only slightly growing market raises concerns about the nature of the excess capacity. Such high fixed costs and relatively low volumes will weigh heavy on the firm. Further studies are strongly recommended with an eye to reducing fixed costs in terms of the overcapacity issue.

Table 1

PROFITABILITY KARMEX KROVAR HYVAR

Standard Mfg costs per unit

Materials $ 0.40 $ 0.70 $ 1.00

Variable Conversion 0.80 1.00 1.20

Fixed Conversion 0.50 0.80 1.30

Budgeted & actual selling com $ 0.10 $ 0.15 $ 0.26

Actual material & variable costs $ 1.30 $ 1.50 $ 2.15

Budgeted material & variable costs $ 1.30 $ 1.85 $ 2.46

Actual Revenue / unit $ 1.90 $ 4.00 $ 4.60

Budgeted Revenue / unit $