Lehigh’s 1993 product mix Essay

EXECUTIVE SUMMARYThe objective of this memo is to recommend you a product mix for Lehigh in the year of 1993 ground on profit calculations and other business retainers.Recommendation 1993 product mix should include altogether High Speed establish on an approach sequential from the combination of first principle plus Theory of Constraints (TOC), I recommend that the company include only the High Speed ( tool coil) in its mix. The table bellow contains the unitary live for Standard and ABC and the throughput per unit of the agonistic resource ($/min), calculated diving the unitary ABC cost ($/lb) by the implement time for the pealing process (lb/min)The following paragraphs present a deeper analysis to allow comprehension of the logical steps that led to this recommendation.Rationale ABC and TOC combined approachThe study idea behind combining ABC and TOC approaches is to come up with a fourth method of calculating profits that overcomes the shortcomings of the other three met hods (Standard, ABC and TOC). Based on the ABC model (see description of this model in the next section of this report Alternatives Rejected), I calculated the unitary operate profit per product. This operating profit eliminates the major issue concerning the Standard Costing system to average uneven resource consumption across products. The next step was to incorporate the ideal of time as a factor used in Lehighs decision-making. First, by obtaining information from the operations staff, I defined the CRM as the constraint of the plant. Then, I calculated thethroughput per unit of the constrained process (Rolling CRM) by diving the unitary ABC cost ($/lb) by the machine time for the rolling process (lb/min). register 1 presents the results for these calculations. check to this approach, alloys, roller wires and chipper knives present losses, while only high speeds and round bars showed profits respectively $4.84 and $0.08 per minute of rolling machine (CRM) used. However, cons idering this small profit per minute for round bars and that Die Steel market is broad and requires that its participants offer a full product line to bear on share (this means that Chipper Knives should also be produced), I recommend that Die Steel products be removed from product mix. Consequently, high speeds are the only products that I recommend be kept in Lehighs product mix in 1993.It is important to mention that with demand recovering in 1993 and Lehighs superior product performance, it may be possible that the company command a price premium for its alloys high enough to turn it profitable in this method and, consequently, to include it in its product mix. Alternatives rejected Standard, ABC cost and TOC approachAnalyzing the scenario, Lehigh had 3 other possibilities for calculating its profit per productStandard beThe product weight was considered the primary driver of resource consumption, so the indirect manufacturing and administrative costs were allocated to product s found on pounds produced. As a result, this approach considers that to each one of the five products uses manufacturing and administrative overhead equally (their unitary costs are all $0.64 per pound). Moreover, direct manufacturing costs were allocated based on machine hours and materials and direct grasp were allocated based on the bill of materials and routings. The calculations for this first alternative are presented in exhibit 2. According to this approach, all products but alloys present operating losses. However, standard costing is averaging the diverse resource use by products and that one it points as the most profitable (alloys) is already promoted by marketing and sales teams, but Lehigh is non screening profits during this period. Therefore, this alternative is not recommended.ABC costingIn this second approach, I considered Utilities, Maintenance and Depreciation as direct manufacturing costs and allocated them based on machine hours. Number of skus was consid ered driver for Technical Support. The product weight was considered driver of resource consumption only for General & Administrative costs. Moreover, materials and direct labor were allocated based on the bill of materials and routings (exactly the way they were allocated in Standard Costing system). Finally, Material Handling & Setup, Order Processing and Production Planning were driven to products using itemize of orders. Consequently, ABC solves the major issue regarding the Standard Costing system the assumption that all overhead costs can be included into one cost pool.All the drivers are summarized in exhibit 3. Exhibits 4 and 5 present respectively the ABC drivers and allocation rates. The calculations for this alternative are presented in exhibit 6. According to this approach, alloys, roller wires and chipper knives present operating losses, while only high speeds and round bars showed operating profits $0.15 and $0.01 per pound. However, ABC does not take into considerati on how smoothly material flowed through the plant and product profitability should reflect this kind of difference in resource consumption. This is the reason why this alternative was not selected.TOC approachIn this third approach, it was proposed a simple operational measure to orientate the decision-making process within the company Throughput. It was calculated as sales slight material cost (contribution margin) per unit of the constrained resource. As already mentioned, the rolling process (CRM) is the bottleneck of the plant. TOC approach considers that the efficient management of the constrained resource is the key factor to increase profitability. The calculations for this alternative are presented in exhibit 7.According to this approach, high speeds and alloys were the products that showed higher contribution margins $25.00 and $17.70 per minute of rolling machine (CRM) used. However, TOC approach only takes into consideration the material costs, leaving aside all the othe r relevant costs that could be allocated to each product according to ABC approach. In other words, TOC method does not reflect the real operating profits. Consideringthis point, this alternative was discarded.