7 2 Five Star Tools Bunni Wheeler

Managerial Accounting BUS 5431 Fall 2012 December 2, 2012

Executive Summary Five Star Tools is a family owned manufacturing company that manufactures chisels and saws used by jewelers. They produce the tools utilizing a 3 step process. In the past two years the company has experienced significant growth and at times has not been able to meet order deadlines. Management has identified that they have a bottle neck in the coating and sharpening process. Overview The president of Five Star Tools, Maxfield Turner decided to meet with the vice president of marketing Betty Spence to discussion the missed deadlines and production capacity. In their meeting Betty Spence believes they should stop accepting orders in which they cannot meet customer deadlines to maintain their reputation in the industry. The president of the company Maxfield Turner believes that they should look at the companys product offerings and production constraints. He wants to review with the accounting department the potential impact of eliminating less profitable product offerings and with the production department on ways to loosen the constraint in the coating process. Issues Addressed A. Identify the Binding Constraint Since management has identified that the bottleneck occurs at the coating and sharpening process production should be reduced in the cutting and chemical bath departments to meet the needs of the coating and sharpening department. This should be done regardless of the production capacity of these departments because work is stacking up in the coating and sharpening department. B. Optimize Use of Constraint Model C210 should be emphasized if constraint cannot be loosed in the coating and sharpening department. Each hour this model produces $1,250 of incremental profit compared to $537.50 produced by Model D400. Model C210 Chisel $ 500.00 Model D400 Chisel $ 850.00 $ 180.00 $ 180.00 $ 60.00

Selling price Less Variable cost per unit: Direct Labor Direct material Variable overhead Contribution margin Less allocated fixed cost Profit per unit Time in coating and sharpening to produce 1 unit Contribution margin per hour $ $ $

85.00 150.00 15.00 $ $ $ $ 250.00 250.00 185.00 65.00

$ $ $ $

420.00 430.00 230.00 200.00

.2 hours $ 1,250.00

.8 hours $ 537.50

C. Subordinate Everything Else to Constraint If management was able to loosen constraint enough to gain an additional hour of production time they would gain an additional $1,250 of profit for Model C210 and $537.50 for Model D400. Suggested Resolutions D. Break the Constraint Management can use the additional inspection station to loosen the constraint in the coating and sharpening department. This action will generate an additional 240 hours per year of additional production time in the coating and sharpening department. This will gain them an additional $600 in profit per unit or $216,000 per year. Contribution margin Time in coating and sharpening $ Conclusion During Maxfield Turner meeting next month with Betty Spence he should present to her his findings and suggestions on reducing the constraint in the coating and sharpening department. By adding an additional inspection point before the coating and sharpening department they will be able to loosen the constraint and free up an additional 240 hours of production time for the year. Additionally, they need to emphasize sales of the Model C210 chisel because it has the highest contribution margin. Betty Spence should instruct her department to market this product more to its customers. $300 0.5 600.00