It is currently busy season at the professional service firm. You are currently juggling multiple clients, working 12 hour days, when approached by one of the senior partners at the firm. "I need your help for a very high profile client in our firm. This client contributes a great deal of revenue so I have compiled the best resources to work on this engagement together. Please meet me in the boardroom in 5 minutes where I will introduce you to the rest of your engagement team and explain the client's needs".
Innovate Solutions Inc. produces a wide variety of drums for shipment of liquids and powders. The two most common types of drums are the open top and the welded top. These drums are manufactured using injection blow molding technology and have either a separate lid or a welded type top with the bung holes molded in. Metal drums are manufactured with steel hot-rolled into long pipe-like sections then forged on a stamping press while still red-hot into drum bodies. A welded rolled seam is then made for the drum bottom, or both top and bottom. In this industry, client relationships and product quality are important for reoccurring business.
One of the company's products is a heavy-duty, environmentally friendly, corrosion-resistant metal drum, called the Stronghold drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 4,500 hours of welding time is available annually on the machine. Since each drum requires 0.6 hours of welding time, annual production is limited to 7,500 drums. At present, the welding machine is used exclusively to make the Stronghold drums. The accounting department has provided the following financial data concerning the Stronghold drums:
Stronghold Drums
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Selling price per drum
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$225.00
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Cost per drum:
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|
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Direct materials
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$78.15
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Direct labor ($27 per hour)
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5.40
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Manufacturing overhead
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6.75
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Selling and administrative expense
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44.70
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Margin per drum
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$90.00
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Management believes that 9,000 stronghold drums could be sold each year if the company had sufficient manufacturing capacity. As an alternative to adding another welding machine, management has considered buying additional drums from an outside supplier of quality products, Barrels of Fun (BoF), Inc. BoF would be able to provide up to 6,000 Stronghold-type drums per year at a price of $207 per drum, which Innovate would re-label and sell to its customers at its normal selling price.
Sarah Miller, Innovate's production manager, has suggested that the company could make better use of the welding machine by manufacturing wrought iron park benches, which would require 0.75 hours of welding time per bench and yet sell for far more than the drums. Sarah believes that Innovate could sell up to 2,400 wrought iron park benches per year to municipalities and conservation areas at a price of $360 each. The Accounting Department has provided the following data concerning the proposed new product:
Wrought Iron Park Benches
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Selling price per bench
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$360.00
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Cost per bench:
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|
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Direct materials
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$149.10
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Direct labor ($27 per hour)
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43.20
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Manufacturing overhead
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54.00
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Selling and administrative expense
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71.70
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Margin per drum
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$42.00
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The park benches could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of direct labor-hours. Most of the manufacturing overhead consists of fixed common costs such as rent on the factory building, but some of it is variable. The variable manufacturing overhead has been estimated at $2.00 per Stronghold drum and $2.85 per park bench. The variable manufacturing overhead cost would not be incurred on drums acquired from the outside supplier. Regardless of the in-house option chosen, efficient productivity of resources is critical for success.
Selling and administrative expenses are allocated to products on the basis of revenues. Almost all of the selling and administrative expenses are fixed common costs, but it has been estimated that variable selling and administrative expenses amount to $1.15 per Stronghold drum whether made or purchased and would be $1.95 per park bench.
All of the company's employees-direct and indirect-are paid for full 40-hour workweeks and the company has a policy of laying off workers only in major recessions. However Sarah miller is also wondering what the impact would be of eliminating full time contracts using employees as needed on an hourly basis.
REQUIRED:
- Quantitative Analysis on the current state: (EXCEL SPREADSHEET) Push numbers in an analysis that is relevant to the issue at hand. Differentiate between what is relevant and what is irrelevant.
- Qualitative Analysis on the current state: (EXCEL SPREADSHEET) Be sure to analyze qualitative issues - they need discussion in most cases. In particular, analyze alternatives in light of key success factors - will this alternative solve the problem and fit with our key success factors.