Question

Case Study

7-2 FIVE STAR TOOLS

Five star tools is a small family -owned firm that manufactures diamond -coated cutting tools( chisels and saws) used by jewelers. Production involves three major processes. First, steel “ blanks” (tools without the diamond coating) are cut to size. Second, the blanks are sent to a chemical bath that prepares the tools for the coating process. In the third major process, the blanks are coated with diamond chips in a proprietary process that simultaneously coats and sharpens the blade of each tool. Following the coating process , each tool is inspected and defects are repaired or scrapped.

In the past 2 years , the company has experienced significant growth and growing pains. The company is at capacity in the coating and sharpening process, which requires highly skilled workers and expensive equipment. Because of the bottleneck created by this operation, the company has missed deadlines on orders from several important customers.

Maxfield Turner, the son of Frederick Turner, founder of Five Star Tools, is the president of the company. Over lunch he and Betty Spence, vice president of marketing, discussed the situation. “ We’ve got to do something”, Betty began. . “ If we don’t think we can meet a customer’s deadline we should turn down the business. We can’t simply keep customers waiting for product or we’ll develop a reputation as an unreliable supplier. You know as well as I do that this would be devastating our business.”

“ I think there may be another approach , Betty”, replied Max. “ Some of our products are exceptionally profitable. Maybe we should concentrate on them and drop some of the less profitable ones. That would free up our production resources. Or maybe we can figure out a way to run more product through the coating process. If we could just loosen that constraint. I’ll tell you what I’ll do. I’ll get the accounting department to prepare an analysis of product profitability. That should help us figure out which products to concentrate on. And I’ll get the production people thinking about how to free up some time in coating. We’ll meet early next month and try to get a handle on how to deal with our production constraints.”

              Required

A.    What steps can be taken to loosen the constraint in coating and sharpening?

B.     Consider Model C210 and Model D400 chisels. Which product should be emphasized if the constraint in coating and sharpening cannot be loosened?

C.     Focusing only on the Model c210 chisel and the model D400 chisel, what would be the benefit to the firm of gaining one more hour of production time in coating and sharpening ?

D.    In coating and sharpening , the operator begins by inspecting items that have arrived from the chemical bath. If rough edges or blemishes are detected , the operator smooths and / or buffs the items before actual coating or sharpening takes place. ( Note that this process is in addition to the inspection that takes place at a separate inspection station following coating and sharpening.)

In order to save valuable time in coating and sharpening management is considering forming a separate inspection station before the coating and sharpening process. The inspection station can utilize existing smoothing and buffing equipment, and it can be staffed on as -needed bases by an employee who normally works in the chemical bath area, which has excess capacity( so the employee will not be missed for brief periods). Management estimates that this action will free up 240 hours in coating and sharpening( [ an average of 5 minutes per hour x 8 hours per day x 360 operating days per year]/60). Management has calculated that the average contribution margin per unit for its products is $300. The average contribution margin per hour spent in coating and sharpening is $850. Based on this information, estimate the incremental profit per year associated with adding the new inspection station.

                                                       Model C210 Chisel                               Model D400 Chisel

              Selling Price                    $500                                                                          $850

              Less Variable cost:

              Direct Labor                                 $85                                                $180

              Direct Material                            150                                                180

              Variable Overhead                       15                      250                     60            420

              Contributed Margin                                                 250                                      430

              Less allocated fixed costs                                        185                                       230

              Profit Per unit                                                           $65                                       $200

              Time in coating and

              Sharpening to

              Produce 1 unit                              .2 hours                                                        .8 hours

·      Complete individually as an essay or narrative, not as answers to questions or as a problem. Calculations may be necessary to illustrate the issue or to support conclusions

·      Include an executive summary, overview of situation, issues addressed, suggested resolution, and conclusion.

DO NOT PLAGERISE .

Answer 1

Solution: (A) The following are the steps to loosen the constraints in coating and sharpening. A) Identification of bottlenecks and their causes that arises in the process of coating and sharpening. B) Monitoring overall process to control the deviation arising like down time, worker ability, idle time and waiting time. These deviations should be controlled. (B) The contribution margin of model C210 and model D400 are $250 and $430 respectively. After considering both model C210 and model D400, it is better to emphasize C210 model