Dr. Annette Hebble

Topics: Variable cost, Theory of Constraints, Eliyahu M. Goldratt Pages: 6 (815 words) Published: May 8, 2014

Five Star Tools is a manufacturing company owned by the family of Turner. This company produces chisels and saws used by jewelers. The company make used of unique production lines such as cutting the steel blank to size, sent through chemical bath, and finally coated the blank with diamond chips. Five Star Company was passed on from Frederick Turner to his son Maxfield Turner who has experienced growth in his business, yet unable to meet customer’s order deadlines. The decision was made by Maxfield Turner, the company president and its vice president of marketing, Betty Spence instructing accounting department to find a way of eliminating less profitable product and production department to figure out ways to loosen the constraint in the coating process. This case analysis has provided the correct solutions to the constraint as well as identifying the most profitable products. In addition, management also focused on what the incremental profit would be when adding an extra hour of production per time, and incremental profit of adding another station. In order to resolve Five Star tools problem, we have decided to use the Theory of Constraint developed by Eli Goldratt. During the time of identify the binding constraint, the initial step constraint has been identified as the coating and sharpening department. This department requires skilled workers and expensive equipment in order to carry out the production process. Although, this company could not keep up with the growth in consumers demand which automatically affect the company to miss its deadlines. Another strategy that was used was optimizing use of the constraint. During this step, this writer identifies a particular product to count on that will produce the highest contribution per unit of the constraint. Both C210 and D400 were considered and after calculating contribution margin per unit; model C210 generated a higher contribution margin per unit of the constraint of $1,250 than Model D400 $537.50 (see Appendix, Table 2). Furthermore, two ideas were implemented by Five Star Tools Company; these was finding the benefit of gaining one more hour of production time in coating and sharpening with diamond chips. The benefit would be $1,250, this is because more time would be spent working on the Model C210 instead of Model D400 $537.50 (see Appendix, Table 3). The second idea was the addition of an inspection station, where management estimates that it will free up to 240 hours in coating and sharpening. After multiplying the 240 hours saved by $850, it resulted in an incremental profit per year associated with adding a new inspection station for Model D400 $204,000. When multiplying the 240 hours saved by $500, incremental profit per year associated with inspection station for Model C210 $120,000 (see Appendix, Table 4). Suggested resolution for the Five Star was enumerated by the president, Maxfield Turner, and the VP of marketing, Betty Spence where they both agreed to find a lasting solution to handle how to deal with the production constraints of the coating and sharpening department. In order for this to occur, it must break the constraint by outsourcing the coating and sharpening that we cannot handle by the trained workers from other. The issue of bottle neck can be resolved; therefore, there is no need for additional costs of purchasing expensive equipment. In conclusion, the Theory of Constraint developed by Eli Goldratt was used to determine a solution to Five Star’s coating and sharpening issues. Furthermore, Model C210 was determined to give the highest contribution per unit of the constraint which could assist Five Star management to make adequate decisions between using time to produce Model C210 or Model D400. During the production, management could spend more time on model C210. The Theory of Constraint developed by Eli Goldratt will be used to resolve the issue of bottleneck (constraint) that comes along.

Appendix: Supporting Tables and...

References: http://www.fivestar-tools.com/
Jiambalvo, J. (2013). Managerial accounting. (5th ed.). Wiley and Sons.
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