Product processing Taylor Company makes wall paneling used in homes and offices. The company buys walnut logs and processes them into thin sheets of veneer that are then glued to sheets of plywood to make paneling. Taylor also makes the plywood. The company has enough capacity to make 1,000,000 square feet of veneer per month and 1,200,000 square feet of plywood. Capacity in the gluing operation is 1,300,000 square feet per month. Substantial markets exist for plywood and veneer as well as for paneling, though Taylor's managers think of the company as a paneling manufacturer. Taylor's senior operating managers meet monthly to discuss recent operating results and their expectations about the coming months. Jim Chen, Taylor's controller, regularly attends these meetings to assist the managers in their deliberations. To facilitate the monthly discussions, Chen developed the following cost data, per 1,000 square feet of product.
Piywood
$18
25
Veneer
$16
20
Paneling
$ 34
55
93
Direct labor
Overhead
Total
When presenting the cost data, Chen pointed out that the figures shown for paneling were cumulative. That is, the amount for each component of paneling cost was the sum of the costs of veneer and plywood plus the additional costs associated with the gluing operation. (Thus, no new materials are acided in the gluing opera ion, en e first provided the data to operating managers, Chen also pointed out that the variable portion of overhead was approximately 80%6 of labor cost. After some discussion at that meeting about individual components of fixed overhead, the group agreed that all such costs were probably unavoidable.
At their meeting in March of 19X4, Taylor's managers reviewed operating results for January and February, when the prevailing prices (per 1,000 square feet) of Taylors products were $178, $74 and $81 for paneling, veneer and plywood, respectively. Mario Franks, Taylor's sales manager, began the meeting with a smile and kind words for everyone present. "I think even Jim Chen will agree we've leamed how to use cost data in making our decisions. Our prediction of the selling price for paneling was right on target, and we sold all the paneling we could make in both months."
Sam West, the factory manager, agreed, though with reservations. "Yes, I can see that we did the right thing. But you guys don't have to deal with the flack I'm getting about the layoffs of workers in the plywood shop. And almost every week the manager of the gluing shop--you all know Phyllis--hits me with some new scheme for using the people and equipment in her area to work on jobs that have nothing to do with making paneling!
Anxious that the discussion move on to decisions about what to do in the future, Franks said *All water over the dam. What we need to do now is decide whether we should make any changes in production plans for the near future, Some of my people tell me plywood prices could go up soon, probably to around $86. I hate to say this, because I know that paneling got us where we are; but maybe we should consider other alternatives. To Franks' surprise, Jim Chen chimed in at this point to support consideration of alternatives, though not for the same reason. Said Chen, "I haven't yet seen anything to indicate an increase in plywood prices, Mario, though your field people may be right. But everything I read about new construction projects and the market for remodeling suggests that the price for paneling is in for a drop, perhaps to as low as 5164. Even if the field people are wrong and the price of plywood holds at about what it is now, the potential drop in the price for paneling should make us reconsider our position about concentrating on producing paneling" Gene Draper, the recently hired chief operating officer, entered the discussion with the following comments. "I know I'm the new kid on the block here, but I've tried to do my homework, and it seems to me that whatever the prices for what we produce, a major stumbling block for our company is the unequal capacities of our veneer, plywood, and gluing operations. I know that long-term increases in capacity would involve substantial investments in new assets, and we should discuss such investments at a future meeting. But it seems to me that we should at least be considering ways to equalize capacities in the short run. For example, I'd be willing to authorize spending up to $2,000 a month this year for renting whatever equipment would increase our production capacity of either veneer or plywood by 100,000 square feet, but you'll have to tell me which one to spend the money on!
Required
Evaluate the operating managers' understanding of Taylor's cost structure and the new CEO's offer of short-term support to move toward equalizing capacities.