Essays24.com - Term Papers and Free Essays
Search

Aurora Textile Case

Essay by   •  November 1, 2015  •  Case Study  •  5,241 Words (21 Pages)  •  1,722 Views

Essay Preview: Aurora Textile Case

Report this essay
Page 1 of 21

TABLE OF CONTENTS

Case Context        

Case assumptions        

General        

Sales volume and cost projections        

Option 1: Existing Ring Machine        

Option 2: Zinser 351        

Inventory projections        

Analysis        

Framework for Analysis        

Discounted Cash Flow Analysis        

Option 1: Existing Ring Machine        

Option 2: Zinser 351        

Decision        

To replace or not        

When  to replace        

Risks and recommendations        

Risks        

Source of funding        

Effect of price cut        

Other risks        

Recommendations        

Management Actions        

Invest or Pay Dividends        


  1. Case Context

Established in the 1900s, Aurora Textile Co. (“Aurora” or “Company”) is one of the oldest yarn manufacturers in the United States, with operations spanning domestically and across the globe. Major apparel and industrial good manufacturers are the company’s main customers. In particular, Aurora caters to four major customer segments. This is presented in Table 1.1 below. It can be noted that almost 80% of Aurora’s revenue come from the Hosier and Knitted Outerwear segments.

Customer Segment

% of Revenue

Description

Hosier

43%

  • Dominates this market segment
  • Little competition from rivals
  • Enjoys attractive margins

Knitted Outerwear

35%

  • Little product differentiation
  • Fierce competition from rivals
  • Suffers price compression

Wovens

13%

  • Cost efficient to produce
  • Great growth opportunity

Industrial & Specialty

9%

  • Enjoys highest margins
  • Great growth opportunity

Table 1.1 Customer Segments of Aurora

During the past couple of years, the US textile-mill industry suffered from a huge drop of demand for its products. This forced Aurora to retain only four of its facilities to reduce manufacturing costs so that the company can continue its operations. The major causes for the decline of the US textile-mill industry are described in Table 1.2 below.

Cause

Effect

Globalization

  • Some firms shifted operations to Asia due to lower production costs
  • Tougher competition due to imported yarn

Consumer preferences and fads

  • Shift to flexible manufacturing
  • Enabled apparel producers to bring goods to customers in a shorter time

Improvement in IT

  • Liability associated with customer returns increased

Trade policies

  • Free trade agreements worsened US textile environment due to cheaper labor, lower quality of products, and government subsidy.
  • Ban of quotas to take effect on 2005 which could add to industry woes.

Table 1.2 Factors that Contributed to the Decline of the US Textile Industry

The four plants of Aurora that remain in operation are Hunter, Rome, Barton, and Butler. Aurora relies on the rotor spinning technology to manufacture its yarns in the Rome, Barton and Butler plants. Only the Hunter plant makes use of the ring spinning technology. Table 1.3 shows the main differences between the rotor and ring spinning technologies. In a nutshell, the former focuses on efficiency while the latter technology focuses on the quality of the yarn being developed.

Ring

Rotor

  • Better quality
  • Stronger yarn
  • More efficient
  • Less expensive

Table 1.3 Advantages of the Rotor and Ring Spinning Technologies

In order to remain competitive, a project was initiated to update the ring technology in the Hunter plant to increase its efficiency. The Chief Financial Officer (CFO) of Aurora is evaluating two possible options: to continue using the current ring technology machine or replace it with the more efficient Zinser 351 technology. Table 1.4 summarizes the main financial considerations when choosing from the aforementioned options.

Current Ring Machine

Zinser 351

  • Book Value of $ 2 million
  • Depreciated to 0 for 4 years
  • Salvage Value of  $ 500,000 today
  • Can operate for 10 more years
  • Conversion cost at $0.43/lb
  • Customer returns constitutes $0.077/lb
  • SG&A expenses at 7% of the revenues
  • Cotton inventories at 30 days
  • Cost of $ 8.25 million
  • Depreciated to 0 for 10 years
  • Salvage Value of $ 100,000 at year 10
  • One-time training cost of $ 50,000
  • Conversion cost at $0.40/lb
  • Customer returns constitutes $0.084/lb
  • SG&A expenses at 7% of the revenues
  • 10% higher sales price
  • 5% lower sales volume
  • Cotton inventories at 20 days

Table 1.4 Main financial considerations of the two options

The primary advantage of Zinser 351 is its ability to produce higher quality and higher margin products. The efficiency of the new technology would also reduce operating costs by $ 0.03 lb. On the other hand, the primary disadvantage of Zinser 351 is that, compared to the existing ring technology, the company will generate a 5% lower revenue as well as shoulder higher customer liabilities from returns. In addition to that, a huge investment is necessary for Zinser 351 to operate. Given these inputs, the CFO must decide which between these two options is better, given that both options have its costs and benefits.

...

...

Download as:   txt (36.1 Kb)   pdf (492.8 Kb)   docx (39.7 Kb)  
Continue for 20 more pages »
Only available on Essays24.com
Citation Generator

(2015, 11). Aurora Textile Case. Essays24.com. Retrieved 11, 2015, from https://www.essays24.com/essay/Aurora-Textile-Case/64201.html

"Aurora Textile Case" Essays24.com. 11 2015. 2015. 11 2015 <https://www.essays24.com/essay/Aurora-Textile-Case/64201.html>.

"Aurora Textile Case." Essays24.com. Essays24.com, 11 2015. Web. 11 2015. <https://www.essays24.com/essay/Aurora-Textile-Case/64201.html>.

"Aurora Textile Case." Essays24.com. 11, 2015. Accessed 11, 2015. https://www.essays24.com/essay/Aurora-Textile-Case/64201.html.