Shelby Shelving Company

Topics: Variable cost, Profit maximization, Order theory Pages: 3 (396 words) Published: October 11, 2014
The purpose of this analysis is to maximize profit of Shelby Shelving Company, manufacturing two types of shelves for grocery stores; Model S (standard model) and Model LX (heavy duty model). The plant’s engineer suggested that Model S manufacturing should be cut off as they are sold less than their manufacturing cost. On contrary the controller argued that Model S products absorb a large manufacturing overhead burden so even though they are sold at loss, their manufacturing should continue. The analysis is performed by given accounting and production data for Shelby Company. Looking at particular data at first glance, decreasing Model S production and increasing Model LX production seems to be feasible as unit profit for Model S is less than that of Model LX. However a rigorous analysis performed by Microsoft Excel with Solver Add-in indicated that for maximum profit increasing production of model S to its assembly capacity limit. The rationale behind this result is that Model S has lower direct material, direct labour cost and variable overhead cost than Model LX so producing more Model S will allow company to compensate fixed assembly cost better. As a result increasing Model S production up to its assembly capacity and determining production of Model LX based on constraints gives us best solution. Therefore the argument of the controller is more reasonable than that of the plant’s engineer. MODELLING

Assumptions
a) All of the products are sold.
b) Selling prices of Model S and Model LX are constant and cannot be changed as a result of competition. c) There are no machine breakdowns or out of operation periods so hour spent in stamping and forming departments are constant for respective products. d) Direct material cost (per unit), direct labour cost (per unit), fixed overhead costs (per unit), and variable overhead costs per unit e) There are no advance payments received for delivering products later on so quantities of products are non-negative....
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