Five Star Tools
A Presentation By:
Rafiq Doun-Naah
Jayeon Hwang
Patrick O'Connor
Ke Ma
Accounting 606, Dr. Liu
Introduction
Topic: Theory of Constraints
Story:
- Small family-owned firm
- Manufactures diamond-coated cutting tools for jewelers
- Significant growth means Five Star is now at capacity for machine and skilled labor
- Needs to ensure they can meet deadlines or turn away customers
- Concentrate on products, reduce constraints
Supplied Data:
What steps can be taken
to loosen the constraint
in coating and sharpening?
Steps to Loosen Constraints
in coating and sharpening
- Working overtime
- Subcontracting some of the processing.
- Investing in additional machines.
Steps to Loosen Constraints
in coating and sharpening
- Shifting workers from processes that are not bottlenecks to coating and sharpening.
- Focusing business process improvement efforts such as Six Sigma on the coating and sharpening.
- Reducing defective units. Each defective unit that is processed in the bottleneck and subsequently scrapped takes the place of a good unit that could have been sold.
Consider Model C210 and Model D400 chisels.
Which product should be emphasized if the constraint
in coating and sharpening cannot be loosened
Which Product Should Be Emphasized if
Constraint Cannot be Loosened?
The below calculation shows that Model C210 provide the larger contribution margin in relation to the constrained resource. Therefore, Model C210 should be emphasized.
Which Product Should Be Emphasized if
Constraint Cannot be Loosened?
Below calculation shows Model C210 is more profitable than Model D400. Suppose four hour can be used to make either 20 Model C210 chisels (240min/12min) or 5 Model D400 chisels (240min/48).
Because the additional contribution margin for Model C210 is much larger, this model makes the most profitable use of the company’s constrained resource - coating and sharpening.
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?
Benefit to the Firm Gaining One More Hour
of Production Time in Coating and Sharpening
As can be seen from the above figures, if the firm gains one (1) more hour in coating and sharpening, it will produce five (5) more units of model C210 and 1.25 more units of Model D400. This will bring in an additional $1,250 margin for producing Model C210 chisels and $538 total contribution margin for Model D400. Because these additional units do not incur additional fixed costs, the firm’s net profit will increase by $1,788.
Based on this information,
estimate the incremental
profit per year associated
with adding the new
inspection station.
Incremental Profit Per Year
Associated with Adding the New Inspection Station
New station will free up 5 minutes per hour
multiplied by 8 hours per day
multiplied by 360 operation days
Incremental Profit:
Conclusion:
-
Loosen constraints
-
Use contribution margin
per unit of the constrained resource for calculations
- Use one unit of time to determine gains between two items in the bottleneck
- Calculate any potential changes using incremental profit
Questions?
Five Star Tools
By dontrebootme
