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What will be the effect on company profit related to s 90 ing the Northwood Industries job? What qualitative Ve Travel costs Overhead at $30 per nonpartner hour Total 21,000 8,550 $87,350 should be considered in the decision whether job or not? CASE 7-2 FIVE STAR TOOLS [LO A1] wote This case relates to the appendix on the Theory of and Bety Spence, vice president of marketing dicused s situation. "We've got to do something."Betty began. "If we don diamond-coated cutting tools (chisels and down the business. We can't simply keep customers waliting for Constraints.) Five Star Tools is a small family-owned firm that man- think we can meet a customer's order deadline, we should tur y jewelers. Production involves three major pro- product or we'll develop a reputation as an unreliable cesses. First, steel "blanks" (tools without the diamond coating) You know as well as I do that this would be devastating t are cut to size. Second, the blanks are sent to a chemical prepares the tools for the coating process. In the third major pro- cess, the blanks are coated with diamond chips in a proprietary "I think there may be another approach, Betty" replied Ma "Some of our products are except process that simultaneously coats and sharpens the blade of each fects are repaired or scrapped. should concentrate on them and drop some of the less profitable tool. Following the coating process, each tool is inspected and de. 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 coul growth and growing pains. The company is at capacity in the coat- improve our response time and profitability. Ill tell you whatT ing and sharpening process, which requires highly skilled workers do. T'il get the accounting department to prepare an analysis d and expensive equipment. Because of the bottleneck created by product profitability. That should help us figure out which prod this operation, the company has missed deadlines on orders from ucts to concentrate on. And I'll get the production people think In the past 2 years, the company has experienced significant several important customers. ing about how to free up some time in coating. We'll meet eart Maxfield Turner, the son of Frederick Turner, founder of next month and try to get a handle on how to deal with our po Five Star Tools, is the president of the company. Over lunch he duction constraints." Case 29:3 REQUIRED 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 calcu- lated that the average contribution margin per unit for its prod- er a. What steps can be taken to loosen the constraint in coating and sharpening? b. Consider Model C210 and Model D400 chisels. Whichucts is $300. The average contribution margin per hour spent in product should be emphasized if the constraint in coating and coating and sharpening is $850. sharpening cannot be loosened? c. Focusing only on the Model C210 chisel and the model D400 year associated with adding 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 chenical bath. If rough edges or blemishes are detected, the operator smooths and/or buffs the Based on this information, estimate the incremental profit per Model D400 Chisel Model C210 Chisel $850 $500 Selling price Less variable costs items before actual coating or sharpening nkes piace (Note that this process is in addition to the inspection that tikes place at a separate inspection station following coating and sharpening.) Direct labor Direct material Variable overhead s 85 150 15 $180 180 60 420 430 230 $200 250 In order to save valuable time in coating and sharpening,manContribution margin agement is considering forming a separate inspection station Less allocated fixed costs 185 before the coating and sharpening process. The inspection station Prnerntd can utilize existing smoothing and buffing equipment, and it can be staffed on an S 65 Profit t, and it can norm Time in coating ally employee who as-needed basis by an sharpening to produce 1 unit works in the chemical bath area, which has excess capacity (so the employee will not be missed for brief periods). Management 2 hours 8 hours