(Note: This case relates to the appendix on the Theory of Constraints.) Include an executive summary, overview of

situation, issues addressed, suggested resolution, and conclusion. The overview need not contain a complete

restatement of the case, just enough background for a reader not familiar with the case to follow the narrative.

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 two 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. Weve got to do something, Betty began. If we dont think we can meet a customers order

deadline, we should turn down the business. We cant simply keep customers waiting for product or well develop are

putation as an unreliable supplier. You know as well as I do that this would be devastating to 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 know we could improve our response time and profitability. Ill tell you

what Ill do. Ill get the accounting department to prepare an analysis of product profitability.That should help

us figure out which products to concentrate on. And Ill get the production people thinking about how to free

up some time in coating. Well 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 an asneeded basis 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 _ 8 hours per day _360 operating days per year).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

Selling price

Less variable costs:

Direct labor

Direct material

Variable overhead

Contribution margin

Less allocated fixed

costs

Profit per unit

Time in coating

and sharpening

to produce 1 unit

Model D400 Chisel________

$500

$ 85

150

15

$850

$

180

180

60 420

430

250

250

185

$ 65

.2 hours

230

$200

.8 hours